We can write this as mvr py velocity is positively

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Unformatted text preview: us changes in the AD and AS curves shocks to the economy. A shock that shifts the aggregate demand curve is called a demand shock, while a shock that shifts the aggregate supply curve is called a supply shock. These shocks disrupt economic well- being by pushing output and employment away from their natural levels. Economists use the term stabilization policy to refer to policy actions aimed at reducing the severity of short- run economic fluctuations. Stabilization policy dampens the business cycle by keeping output and employment as close to their natural levels as possible, and often involves a tradeoff between maintaining full employment and keeping inflation under control. AD Shock: Expanded use of credit cards is a demand shock. It increases the velocity of money since the money demand parameter k falls. If the money supply is held constant, nominal spending rises and aggregate demand shifts outward. This raises the output of the economy. Over time, the high aggregate demand pulls up wages and prices, the quantity of output demanded declines, and the economy gradually approaches the natural rate of production. The Bank of Canada could reduce the money supply to offset the increase in velocity and dampen the boom to keep output closer to the natural level. AS Shock: a supply shock is a shock to the economy that alters the cost of producing goods and services, and, as a result, the prices that firms charge. Sometimes called price shocks. Supply shocks can be adverse or they can be favourable. In an adverse supply shock, the SRAS curve shifts up, causing output to fall and prices to rise, stagflation. The Bank of Canada can either: hold AD constant, and eventually prices will fall again and we’ll move along the AD curve back to the LRAS after a long recession, or they Page 29 of 52 Jessica Gahtan Prof: Mokhles Hossain Macroeconomics ECON2000 Fall 2013 can “accommodate” the supply shock and stimulate aggregate demand to bring the economy back to the natural level, resulting in a permanently higher price level but avoiding a long recession. Chapter 10 In 1936, British economist John Maynard Keynes revolutionized economics with The General Theory of Employment, Interest, and Money, in which he presented an alternative to classical theo...
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This test prep was uploaded on 03/28/2014 for the course ECON 2000 taught by Professor Henriques during the Fall '10 term at York University.

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