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Principles of Economics- Mankiw (5th) 698

Principles of Economics- Mankiw (5th) 698 - 722 PA R T T W...

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722 PART TWELVE SHORT-RUN ECONOMIC FLUCTUATIONS What should policymakers do when faced with such a recession? One possi- bility is to take action to increase aggregate demand. As we noted earlier, an in- crease in government spending or an increase in the money supply would increase the quantity of goods and services demanded at any price and, therefore, would shift the aggregate-demand curve to the right. If policymakers can act with suffi- cient speed and precision, they can offset the initial shift in aggregate demand, re- turn the aggregate-demand curve back to AD 1 , and bring the economy back to point A. (The next chapter discusses in more detail the ways in which monetary and fiscal policy influence aggregate demand, as well as some of the practical dif- ficulties in using these policy instruments.) Even without action by policymakers, the recession will remedy itself over a period of time. Because of the reduction in aggregate demand, the price level falls.
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