business owner decides NOT to take out loan investment and AD decrease real GDP

Business owner decides not to take out loan

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business owner decides NOT to take out loaninvestment and AD decreasereal GDP decreases and unemployment rises (AD_AS)
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Why doesn’t Monetary Policy Always WorkMonetary policy has its flaws that can decrease effectiveness, including:oDiminished effects in the long runoExpectations reducing the effects of policyoIf downturns are caused by AS rather than AD shifts Long-Run Effects of Monetary PolicyIn the short run, monetary policy allowed a new business to open.In the long-run, resource prices (including wages) rise, and other prices rise as well.oIncreasing input prices will force businesses to cut back on production and may be even lay off workersoEventually production and employment will go back to pre-expansionary levels, with permanently higher price level
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Short Run Vs. Long RunLong-RunoLong run economic growth happens by changes in resources, technology, or institutions, notchanges in the money supplyMonetary neutrality oThe idea that the money supply does not affect real economic variables in the long-runMonetary policy is only useful in the SR:oReal effectoRecessions and unemployment can be painfulPolicy can smooth business cycle fluctuationsAdjustments in Expectations
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If people expect monetary policy changes, they may anticipate changes in inflation.oIn that case rational households will try to protect themselves from anticipated inflation (they have all the incentives to do so!)oWhich means that if expansionary monetary policy and subsequent inflation is anticipated, then suppliers and workers will demand higher wages.oThis means all the prices adjust fully as a response to expansionary monetary policy.oHence its effect will be limited and short livedAggregate Supply Shifts and the Great RecessionGreat RecessionoNot all downturns are caused from a decrease in AD.oLRAS and AD decreased in the last recession.Monetary Policy Issues:oLimited ability to return to the original output levelCannot shift LRASAggregate Supply Induced Recession
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The Phillips Curve- we skip thisInternational Trade and FinanceBig Questions? 1.Is Globalization for Real? (Ch. 19, pages 608-616) 2.Why do exchange rates fall and rise? (ch.20, pg. 636-650) 3. What is purchasing power parity (Ch. 20, pg. 651-655)
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