Unformatted text preview: d Growth
LRAS and Growth Vertical need not mean fixed LRAS can shift right
– P Population Capital stock
Technology Real GDP rises Prices fall – Good deflation
– AD can also shift right LRAS LRAS P0 P1 AD
y0 y1 y Short Run Aggregate Supply
Short Run Aggregate Supply “Sticky “ wages and prices – Contracts
– Menu costs P
AS AS slopes up – Price rises
– Value of labor rises
– If w fixed then L rises
– y rises as a result y What Causes a Recession?
What Causes a Recession? Assume we start at y0 – In LR equilibrium
– Investment falls P LRAS What happens to AD? y0 y The Onset of a Recession
The Onset of a Recession AD shifts right – Also happens if C, G, or NX falls GDP falls P AD LRAS AD’ AS – y1 < yfe Prices fall as well
y1 yfe=y0 y What Cures a Recession?
What Cures a Recession? GDP falls – Fewer workers hired Unemployment rises P LRAS AD AS AD’ AS’ – Wages fall AS shifts out – Firms hire more
– yfe restored y1 y0 y Why Bother Intervening?
Why Bother Intervening? The adjustment process may be slow – We may have y < yfe for a long time “In the long run, we’re all dead” Did Obama’s Stimulus “Fail”?
Did Obama’s Stimulus “Fail”? What is “failure”? – Unemployment has only recently fallen below 8%
– Congress is unwilling to spend more The problem was bad numbers – In early 2009, things looked very bad BEA estimated that GDP fell at an annual rate of 3.8% in 2008.IV Designed massive stimulus in response – It turns out things were even worse Revised figures show GDP shrank 8.9% in 2008.IV Massive wasn’t massive enough Perceived Problem
P AD AS y Investment Collapses & GDP Investment Collapses & GDP Falls
AD P AS AD’ Q Increasing G Should Restore Increasing G Should Restore GDP
AD P AS AD’ Q But the Drop Was Much Greater
But the Drop Was Much Greater
AD P AS AD’ Q The Response Was Inadequate
The Response Was Inadequate
P AD AS AD’ Q The Result
The Result The economy avoided Armageddon Things were still bad People are now calling for spending cuts What will that do?...
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- Spring '12
- run aggregate supply