Monetarists - AS & AD

Moderate Monetarists would argue, as Classical economists do, that the economy may behave slightly differently in the short run from in the long run.

Short run

In the short run any increase in the money supply may lead to an increase in aggregate demand. This may, in turn, lead to more employment, but before long people's expectations will catch up and as we saw with the expectations augmented Phillips Curve the effects of the boost will only be short-lived. Inflation picks up and wipes out any short-term gains. The following diagram shows this:

Output grows a bit, but inflation is pushed up and once the inflation is in the system people will begin to anticipate it.

Long-run

In the long run, any attempts to reduce unemployment below its natural rate will result in inflation. This means that there is no long-run trade-off between unemployment and inflation, and the long-run aggregate supply curve will be vertical.

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