ECON 205 1st Edition Lecture 18 Outline of Last Lecture - Continuation of chapter 20Outline of Current Lecture - Effects of a Shift in AD- Effects of a Shift in SRAS- John Maynard Keynes (1883-1946)Current LectureEffects of a Shift in AD- Event: Stock Market crasho C fallso AD shifts lefto Short-run equilibrium at Bo P and Y lower, unemployment highero 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 BoomEffects of a Shift in SRAS- Event: Oil Prices riseo Increases costso SRAS shifts lefto 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 Ao Use fiscal or monetary policy to increase AD and accommodate the AS shift: Y back to YN, but P is permanently higherJohn 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 ifin 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 DemandIntro- 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 rateAggregate Demand- AD curve slopes downward for 3 reasons: wealth effect, interest rate effect (most important), and exchange-rate effectTheory of liquidity preference- Money demand reflects how much wealth people want in cash (liquid form)- Household wealth
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