(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
In the final section we are going to analyze the effects of a monetary expansion in the short and long run.
(Description)
Because of the economic slowdown associated with the 2007 - 2009 recession, the Federal Open Market Committee of the Federal Reserve, between September 18, 2007 and December 16, 2008, lowered the federal funds rate in a series of steps from a high of 5.25 percent to a rate between zero and 0.25 percent. The idea was to provide a boost to the economy by increasing aggregate demand. Suppose that in 2013 the economy is at potential output but that this is somehow overlooked by the Fed, which continues its monetary expansion. What happens to the price level and output in the long run? On the Figure there are graphs of aggregate supply and demand. Horizontal axis corresponds to real GDP. Vertical axis corresponds to aggregate price level. Two straight lines are plotted with aggregate demand line AD passing through points on two axes at the same distance from the origin and supply line SRAS passing through the origin and bisecting the quadrant. Lines intersect at point (Y1,p1). Y1 equals Y asterisk. Additional line LRAS parallel to aggregate price level axis through intersection point of AD and SRAS is plotted.
(Speaker)
We are going to start with the basic aggregate demand aggregate supply graph, with the real GDP equal to potential output. In part B, we showed that an increase in the money supply would lower interest rates and increase aggregate demand.
(Description)
... But in the long run, nominal wages will also increase causing short-run aggregate supply to shift left. The economy will return to potential output. On the Figure there are graphs of aggregate supply and demand. Two straight lines are plotted with aggregate demand line AD passing through points on two axes at the same distance from the origin and supply line SRAS passing through the origin and bisecting the quadrant. Lines intersect at point (Y1,p1). Y1 equals Y asterisk. Additional line LRAS parallel to aggregate price level axis through intersection point of AD and SRAS is plotted. New aggregate demand line AD2 parallel to the original AD1 line and shifted to the right is plotted. Arrows indicate the shift of line to the right.
(Speaker)
In the short run, a monetary expansion will cause real GDP and aggregate price level to increase. Over the long run, workers will demand higher nominal wages. In many cases, nominal wages will adjust automatically in response to the higher price level. The increase in nominal wages will cause the short-run aggregate supply line to shift left.
(Description)
On the Figure there are graphs of aggregate supply and demand. Two straight lines are plotted with aggregate demand line AD passing through points on two axes at the same distance from the origin and supply line SRAS passing through the origin and bisecting the quadrant. Lines intersect at point (Y1,p1). Y1 equals Y asterisk. Additional line LRAS parallel to aggregate price level axis through intersection point of AD and SRAS is plotted. New aggregate demand line AD2 parallel to the original AD1 line and shifted to the right is plotted. Another new line AS2 parallel to original supply line AS1 and shifted to the left is plotted such as all three lines AD2, LRAS and AS2 meet in the same point. Arrows indicate the shift of line to the left. New intersection point is (Y asterisk, P2). Arrow pointing up from P1 to P2 is plotted along the aggregate price level axis
(Speaker)
The economy will end up in equilibrium at potential GDP, but with a higher price level.