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Unformatted text preview: 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 earl...
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