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What is the LR & SR impact of an increase in monetary base while at full GDP?

User Wenzul
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Final answer:

In economics, an increase in the monetary base does not have a significant impact on LRAS and SRAS at full GDP due to the long-run factors that determine the potential of an economy. However, in the short run, it can lead to an increase in SRAS and inflationary pressures.

Step-by-step explanation:

In economics, the impact of an increase in the monetary base on the LRAS (long-run aggregate supply) and SRAS (short-run aggregate supply) depends on the situation of the economy. If the economy is at full GDP, an increase in the monetary base would not have a significant impact on LRAS and SRAS. This is because LRAS represents the full-employment level of output and is determined by factors such as technology, resources, and institutions, which are not affected by monetary policy.

In the short run, an increase in the monetary base can lead to an increase in aggregate demand (AD) and therefore an increase in SRAS. However, since the economy is already at full GDP, the increase in SRAS caused by the increase in the monetary base may not have a substantial impact on real GDP. Instead, it may lead to inflationary pressures as the price level increases.

Overall, while an increase in the monetary base can influence the short-run dynamics of the economy, its impact on LRAS and SRAS at full GDP is limited due to the factors that determine the long-run potential of an economy.

User Saanch
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