This graph shows the short-run aggregate supply curve (SRAS) for the economy. The Bank of Canada uses monetary

Question

This graph shows the short-run aggregate supply curve (SRAS) for the economy. The Bank of Canada uses monetary policy to reduce the expected price level. Show the impact of this on the short-run aggregate supply curve

Will it shif to the right or to the left?

Answer 1

Where is the graph. No central bank including the Bank of Canada can affect the short-run supply curve, except to the extent that the marginal cost curve can shift downwards to the right because of an interest rate reduction. The Bank of Canada will try to increase aggregate demand that would cause capacity utilisation to increase or investnments in capacity expansion to increase and bring forth higher supplies. In the short run, very little can be done to increase aggregate supply, except by liberalising imports or imports by the Govt.