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Unformatted text preview: rates are downward sticky or rigid . Therefore the supply curve cannot shift downwards. Yet unemployment can be cured. The only requirement here is to make adjustments on the demand side. If the government undertakes fiscal policy and increases public spending, effective demand will increase. This will cause aggregate demand curve to shift upwards as AD 2 . The new demand curve intersects both the old supply curve SAS 1 as well as the long run supply curve at point e 2 . Therefore this is the full employment equilibrium . At this point output and employment levels are Y 2 and price level is P 2 . Therefore though the price level P 2 is somewhat higher, the problem of unemployment has been solved immediately....
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.
- Fall '10