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Unformatted text preview: 1 8-1 The Aggregate Demand and Supply Model, Part 2 8-2 Agenda 1. Aggregate Demand Shocks 2. Aggregate Supply Shocks a. Temporary Supply Shocks b. Permanent Supply Shocks 8-3 Aggregate Demand Shocks Aggregate demand shocks are events that cause the AD curve to shift. Positive, or favorable, demand shocks initially cause economic output to increase. Negative, or unfavorable, demand shocks initially cause economic output to decrease. 8-4 2003 2006 Positive Demand Shock From 2003 - 2006: 1. Taxes were reduced, 2. The Federal Reserve eased monetary policy, 3. Banks loosened credit standards, creating a lending boom, and causing a positive demand shock . 2 8-5 2003 2006 Positive Demand Shock Y Y P SRAS ( e = ) LRAS AD 8-6 2003 2006 Positive Demand Shock Year Unemployment Rate (%) Inflation (Year to Year) (%) 2003 6.0 2.3 2004 5.5 2.7 2005 5.1 3.4 2006 4.6 3.2 Unemployment and Inflation, 2003 - 2006 8-7 Aggregate Demand Shocks Positive demand shocks : 1. Immediately shift the AD curve to the right, 2. Initially leading to increases in economic output and to increases in inflation, and 3. Ultimately resulting in: a. No change in economic output, but b. Permanently higher inflation. 8-8 1980 1986 Negative Demand Shock In the early 1980s: 1. The central bank engaged in a significant tightening of monetary policy causing a negative demand shock . 3...
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- Spring '08