Question

Suppose that a new Fed chair is appointed and that his or her approach to monetary policy can be summarized by the following statement: "I care only about increasing employment. Inflation has been at very low levels for quite some time; my priority is to ease monetary policy to promote employment." How would you expect the monetary policy curve to be affected, if at all?

Short answer

"If prices and wages are totally flexible, then gammay = 0 Y and changes in aggregate demand have the smallest influence on output," according to the supplied statement. is true.

Step-by-step solution

Step 1. Concept of Perfectly flexible pricing 

Perfectly flexible pricing are those that are altered as a result of negotiations between buyers and sellers. Wages that are perfectly flexible are those that are affected by changes in demand and supply. The overall demand for goods and services produced in an economy is referred to as aggregate demand (AD).

Step 2. Explanation

The stated assertion is correct. Perfectly flexible wages and prices bring Y close to zero and allow the AD to have a minor impact on output.

More flexible salaries and pricing reflect the fact that the economy's demand and supply are constantly changing. These modifications and negotiations by both buyers and sellers have a smaller impact on the value of Y, and Y is not equal to 0 in this situation.

The aggregate demand curve also grows steeper when it adjusts over a short period of time due to the effect of flexible pricing and flexible wages. The output is affected by a steeper aggregate demand curve, although the effect is not significant.