girlpersonhuman
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What does that mean?
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confuzzledteen
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It basically means what you have to sacrifice to gain something..
So for example, if you use contractionary monetary policy (i.e. higher interest rates & a tighter money supply), you're basically going to decrease Aggregate Demand, right? So though this will lead to a lower level of inflation, it'll also result in a fall in real output; hence, the trade-off of low inflation would be lower levels of economic growth (and potentially, unemployment as a result of that).
Hope this helps
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girlpersonhuman
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(Original post by confuzzledteen)
It basically means what you have to sacrifice to gain something..
So for example, if you use contractionary monetary policy (i.e. higher interest rates & a tighter money supply), you're basically going to decrease Aggregate Demand, right? So though this will lead to a lower level of inflation, it'll also result in a fall in real output; hence, the trade-off of low inflation would be lower levels of economic growth (and potentially, unemployment as a result of that).
Hope this helps
Oh, I kind of get it, wow everything is linked. I was going through supply and demand yesterday and how the pandemic affected the Aggregate supply and demand curve. Thank you
Can this be linked to the covid's impact on the economy?
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confuzzledteen
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(Original post by curiousperson123)
Oh, I kind of get it, wow everything is linked. I was going through supply and demand yesterday and how the pandemic affected the Aggregate supply and demand curve. Thank you
Can this be linked to the covid's impact on the economy?
No worries! And yes, that's what I love about Macroeconomics - how everything seems to be linked & can be boiled down to the 6 Macroeconomic Objectives. In terms of Covid-19 and its impact on the UK's economy, the Bank of England (the Central Bank) has slashed interest rates to 0.1% which is super low (they posted it here: https://www.bankofengland.co.uk/coronavirus) So as that's the base rate, commercial banks are likely to be giving loans with interest rates around that low as well, in order to encourage people to borrow & spend money to get the economy out of the slump that it's currently in So atm, I'd say that monetary policy is expansionary.. But there aren't any trade-offs I think, because if you think about the Keynesians LRAS curve, if the economy is currently in a recession (so at below full employment output level), increases in AD bring greater real output (i.e. econ. growth & lower unemployment) but do not have any inflationary pressure
Last edited by confuzzledteen; 9 months ago
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girlpersonhuman
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(Original post by confuzzledteen)
No worries! And yes, that's what I love about Macroeconomics - how everything seems to be linked & can be boiled down to the 6 Macroeconomic Objectives. In terms of Covid-19 and its impact on the UK's economy, the Bank of England (the Central Bank) has slashed interest rates to 0.1% which is super low (they posted it here: https://www.bankofengland.co.uk/coronavirus) So as that's the base rate, commercial banks are likely to be giving loans with interest rates around that low as well, in order to encourage people to borrow & spend money to get the economy out of the slump that it's currently in So atm, I'd say that monetary policy is expansionary.. But there aren't any trade-offs I think, because if you think about the Keynesians LRAS curve, if the economy is currently in a recession (so at below full employment output level), increases in AD bring greater real output (i.e. econ. growth & lower unemployment) but do not have any inflationary pressure
Hi,
I went through what you said again and I have a few questions, I hope you do not mind

In the first message, you said contractionary monetary policy (higher interest rate and tighter money supply) - what do you mean by 'tighter money supply'?
And how does that lead to lower levels of inflation?

In the second message:
when you said expansionary, do you mean by how it will take time for the economy to grow as a result of low interest rates and it encourages people to borrow and spend? This increases AD and therefore, greater real output and economic growth...

I also don't get the last part after but, 'do not have any inflationary pressure'?

Thank you
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