- Final: chapters 1-15- Office hourso Thurs 4-5 in 7416 Social science and 5-6:30 in 6203 Social scienceo Mon 9:30-11:30 in 7416 Social scienceo Tue 2-4 in 7416 Social scienceo Wed 2-4 in 7416 Social science- Conflict exam: Fri 9:30-11:30 5206 Soc Sci- Final: Thu 10:05-12:05--------------------------------------------------------------------------------------------------------------------------------AD/AS model1. Start in LR equilibrium2. Model the shocko Spending shock on demand side AD shifto Spending shock on supply side SRAS shift3. Find SR equilibriumPSRASLRASA = long run equilibriumAYADYfeo Boom: Ye > Yfe, unemployment is lowo Recession: Yfe > Ye, unemployment is high4. Path to LR equilibrium: in LR the economy always goes to Yfeo Non-activist adjustment to LR equilibrium- Always a story of nominal wage adjustmento OR activist adjustment to LR equilibrium- ΔG fiscal policy- And/or ΔT fiscal policy- ΔMS monetary policy- E.g. negative demand shock1.2. AD shifts left3. Ye < Yfe recession, unemployment = high4. Non-activist vs. activistPSRASLRASP1A = long run equilibriumAP2BYADYeAD’YfeRecessionary gapa. Activisti. AD’ shifts back to ADii. A to B to Aiii. Lower Tiv. Raise Gv. Raise MS (only if not in liquidity trap)b. Non-activistsPSRASLRASP1AP2BYADYeAD’Yfei. A to B to Cii. Since unemployment rises, we expect nominal wages fall which shifts SRAS to the right- E.g. positive demand shockPSRASLRASSRAS’P1AP2CBYADYeAD’YfePSRASLRASP2BP1AAD’YADYeYfeInflationary gapo SR boom, Yfe < Ye, unemployment = lowo LR: Non-activist- nominal wages rise, SRAS shits left, A to B to C Activist- lower G, raise T, or lower MS; A to B to A (Advantage to monetary policy is that it is less political than fiscal)- E.g. negative supply shock (such as rise in the price of crude oil)SRAS’PCSRASLRASP3P2BP1AAD’YADYeYfeSRAS’PSRASLRASBP2P1AYADYeYfeo SRAS shifts left to Bo SR recession, Yfe < Ye, inflation “stagflation” (stagnant economy w/inflation) This is tricky as shifting AD right increases inflation While shifting AD left increases
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