Lecture 17 - ECONOMICS 100B Professor Steven Wood 03/15/11...

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ECONOMICS 100B Professor Steven Wood 03/15/11 Lecture 17 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE: Today’s lecture continues with the Aggregate Demand and Supply Model. AGGREGATE DEMAND SHOCKS: Aggregate demand shocks cause the AD curve to shift. Aggregate demand shocks involve changes in autonomous spending or autonomous monetary policy. Positive, or favorable, demand shocks initially increase economic output. Negative, or unfavorable, demand shocks initially decrease economic output. POSITIVE DEMAND SHOCK: For example, from 2003-2006: 1. Taxes were reduced. This decreased T , which shifted the IS curve to the right. 2. The Federal Reserve eased monetary policy, driving nominal interest rates down. This decreased r , shifting the MP curve down. 3. Banks loosened credit standards, creating a lending boom. This increased C or increased I , shifting the IS curve to the right. All of these changes result in a positive demand shock, immediately shifting the AD curve right to AD 1 . This leads to an increase in inflation from π 0 to π 1 , and an increase in economic output from Y 0 to Y 1 . Short-run equilibrium will now be at point B. However, increased inflation means that inflationary expectations increase. The SRAS curve will thus shift left to SRAS 2 and intersect the AD 1 curve at equilibrium point C. Inflation increases to π 2 and output declines to Y 2 . Inflationary expectations rise again, and the cycle repeats. The SRAS curve will continue to shift left, output will continue to decline towards Y p, and inflation will continue to rise. Eventually, at the intersection of SRAS x and AD 1 , output reaches Y p , and inflation stops accelerating and increasing. The economy reaches general equilibrium again. Overall, positive demand shocks
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This note was uploaded on 02/06/2012 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at Berkeley.

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Lecture 17 - ECONOMICS 100B Professor Steven Wood 03/15/11...

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