Dec 5 - run (labeled with 1s) and the long run (labeled...

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AD-driven recessions go away once labor markets (wages) adjust. Classical and Keynesian economists disagree about what is a reasonable expectation for how long it takes for wages to adjust to shocks like this one. If wages are very sticky, stabilization policies may be useful to help affect AD in the short run.
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These graphs show the effect of an expansionary monetary policy on things in the short
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Unformatted text preview: run (labeled with 1s) and the long run (labeled with 2s). Money affects output and L in the short but not the long run. This is true of all shifts in AD, of course, but in the case of fiscal policy an increase in G crowds out C and I, whereas monetary policy has no effect on any real variable in the long run; this is known as the long-run neutrality...
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Dec 5 - run (labeled with 1s) and the long run (labeled...

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