Would a change in money supply shift the LAS curve?
Yes, a change in money supply can indeed shift the Long-Run Aggregate Supply (LAS) curve. To understand why, let's first clarify what the LAS curve represents.
The LAS curve shows the level of real GDP that an economy can produce when all its resources are fully utilized. It represents the long-term potential output of an economy and is considered to be vertical in the long run, meaning that it is not influenced by changes in the price level.
However, changes in the money supply can affect the LAS curve indirectly by impacting the overall price level in the economy. An increase in the money supply can lead to inflation if the growth in money supply exceeds the growth in real GDP. Conversely, a decrease in money supply can result in deflation if the money supply contracts more rapidly than the economy's output.
This inflation or deflation caused by changes in the money supply can lead to adjustments in the overall price level and production costs faced by firms, which can, in turn, affect the LAS curve. Here's how:
1. Increase in money supply: When the money supply increases, it leads to excess money in the economy, which can increase aggregate demand. As consumers have more money to spend, they may increase their spending on goods and services, causing businesses to increase production to meet the rising demand. This can put upward pressure on the price level, leading to inflation. The increase in the price level increases production costs for businesses, which may be reflected in higher wages, raw material prices, etc. As a result, the LAS curve may shift upward (to the left) due to higher production costs associated with inflation.
2. Decrease in money supply: Conversely, if the money supply decreases, consumers will have less money to spend, leading to reduced aggregate demand. This can potentially lower the price level, causing deflation. The decrease in the price level decreases production costs for businesses, which can shift the LAS curve downward (to the right) due to lower production costs associated with deflation.
It is important to note that the shift in the LAS curve due to changes in money supply is a long-term effect. In the short run, changes in money supply can have more immediate impacts on aggregate demand and the economy's output level, which can affect the Short-Run Aggregate Supply (SAS) curve.
In conclusion, while changes in the money supply can indirectly influence the LAS curve by impacting the price level, it is important to consider the overall economic environment and the interplay of other factors as well.