ECON 205 1st Edition Lecture 18 Outline of Last Lecture Continuation of chapter 20 Outline of Current Lecture Effects of a Shift in AD Effects of a Shift in SRAS John Maynard Keynes 1883 1946 Current Lecture Effects of a Shift in AD Event Stock Market crash o C falls o AD shifts left o Short run equilibrium at B o P and Y lower unemployment higher o Over time PE falls SRAS shifts right until LR equilibrium at C Y and unemployment back at initial levels 2 Large AD shifts The Great Depression and WWII Boom Effects of a Shift in SRAS Event Oil Prices rise o Increases costs o SRAS shifts left o Short run equilibrium point is B From A to B stagflation period of decline in output and increase in prices Accommodating an adverse shift o Policy makers do nothing Low employment would cause wages to decrease and SRAS shifts right until Long run equilibrium is at A o Use fiscal or monetary policy to increase AD and accommodate the AS shift Y back to YN but P is permanently higher John Maynard Keynes 1883 1946 The General Theory of Employment Interest and Money 1936 Argued recessions and depressions can result from inadequate demand policymakers should shift AD Famous critique of classical theory The long run is a misleading guide to current affairs In the long run we are all dead Economists set themselves too easy too useless a task if in tempestuous seasons they can only tell us when the storm is long past the ocean will be flat CHAPTER 21 The Influence of Monetary and Fiscal Policy on Aggregate Demand Intro Long run effects of fiscal policy on interest rates investment and economic growth Long run effects of monetary policy are on the price level and inflation rate Aggregate Demand AD curve slopes downward for 3 reasons wealth effect interest rate effect most important and exchange rate effect Theory of liquidity preference Money demand reflects how much wealth people want in cash liquid form Household wealth include
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