Lecture Notes 8

Lecture Notes 8 - AD-AS curve model GDP x-axis PL y-axis...

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25/04/11 AD-AS curve model, GDP x-axis, PL y-axis Fall in GDP and higher price level would occur with a leftward shift of the AS curve – stagflation – this phenomenon maps on to a scatter diagram – of unemployment by inflation. Philips curve illustrated the empirical, inverse relationship between unemployment and inflation There are points up or down the Philips curve that represent combinations of unemployment and inflation Points that deviate from the curve: high inflation and high unemployment – stagflation – an unpleasant combination – what policy could help? o Any contractionary or expansionary policy will improve one variable whilst worsening the other Late 1970/80s Stagflation: oil price shock (OPEC) o Regan/Carter – how to deal with this problem of high inflation and high unemployment? o There is no Keynsian position that will solve this problem – notion of supply side economics o Policy makers have ignored the supply side of the economy 1980: Supply side economics o Jude Wanniski: ‘The Way The World Works’ – a book focusing on classical economics o All argued that supply side was ignored and that there should be a ‘policy mix’ (assignment problem) of fiscal and monetary policy – two problems require two policies. o Application of the notion of assignment problem: Mundell suggested that monetary is better suited to deal with inflation, and fiscal policy should be used for stimulus o Reagan ran on this economic policy: his stimulus was tax cuts to stimulate the economy, focusing
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Lecture Notes 8 - AD-AS curve model GDP x-axis PL y-axis...

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