In the late 1990s a growing number of economists argued that world policymakers
were focusing too...

Question

In the late 1990s a growing number of economists argued that world policymakers 
were focusing too much on fighting inflation. The economists also argued that 
the technical level of potential output had risen. Show their argument using 
the AS/AD model.Demonstrate the effect of expansionary monetary policy in the AS/AD model when 
the economy is:
a: Below potential output.b: Significantly above potential output

Robert · Accepted Answer

The economy was initially in equilibrium at point A and output is Y0. This output is 
below the full employment level. Full employment level of output is Yf. Expansionary monetary 
policy shift the AD curve right and new equilibrium point is B. At new equilibrium both output 
and price increase.

In the late 1990s a growing number of economists argued that world policymakers were focusing too much on fighting inflation. The economists also argued that the technical level of potential output...

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