lect.09 - Intermediate Macroeconomics I EC21A (Econ 2002)...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Intermediate Macroeconomics I EC21A (Econ 2002 ) Aggregate Demand and Price Adjustment III
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Policy Debates Areas of agreement: Both monetary and fiscal policy can be used to influence the level of output in the short run and the price level in the long run. It is important to maintain a great degree of stability in aggregate demand. That is, most economists advocate that AD should grow at a constant rate in tandem with the expected increase in potential output.
Background image of page 2
Why use monetary or fiscal policy if both are ineffective in the long run? Their effects can be dramatic in the short run. The economy may not be at equilibrium Y ≠ Y * . There may be a need to respond to shocks to the economy.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Shocks to the Economy Aggregate Demand Shock Some event other than a change in policy that shifts the aggregate demand curve. Aggregate Supply (Price) Shock Some event that results in an instant shift in the price level. Price shocks result in an almost instantaneous increase or decrease of the price level if an accommodative policy is not pursued.
Background image of page 4
Shocks to the Economy As macroeconomists, we would like to be able to predict all the different scenarios and possibilities. This is certainly not the case as there are usually many unexpected changes in even the relationships that we have specified. We seek to understand and predict the appropriate fiscal and/or monetary response to unexpected exogenous changes.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aggregate Demand Shock Any unexpected change in any component of aggregate demand that is unrelated to a government policy. Any change in the autonomous portions of the components of AE p will cause a parallel shift in the AD curve.
Background image of page 6
Aggregate Demand Shock Net Export Decreases Assume firstly that Y = Y * Assume now that foreigners’ preference for Jamaican products permanently falls such that the autonomous net export falls. This would result in: the net export function shifting downward, which in turn causes – the AE p curve to shift downwards, which in turn causes the IS curve to shift downwards (leftwards), which in turn causes
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aggregate Demand Shock Net Export Demand Decreases If government is unresponsive, we know that a reduction in AD will: cause output to decrease and leave prices unaffected in the short run, and Eventually, prices will decrease forcing the output level back to its potential level in the long run.
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/15/2011 for the course ECON EC21A taught by Professor Georgiamcleod during the Fall '09 term at University of the West Indies at Mona.

Page1 / 25

lect.09 - Intermediate Macroeconomics I EC21A (Econ 2002)...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online