Intermediate macroeconomics Lecture 7
Intermediate Macroeconomics Lecture 7
How the sr and lr differ a In the Lr, prices are flexible and can respond to changes in S or D. In the sr many prices are stuck at some predetermined level a In the Sr, monetary policy does have a potent effect on output and employment
How the SR and LR Differ ◼ In the LR, prices are flexible and can respond to changes in S or D. In the SR, many prices are stuck at some predetermined level. ◼ In the SR, monetary policy does have a potent effect on output and employment!
Aggregate Demand 以=Y y=y AD(M个 AD 5085100170 a Shifts in the AD curve ---change in money suppl
Aggregate Demand ◼ Shifts in the AD curve --- change in money supply MV PY = M 1 Y kY P V = = P Y AD 1 100 170 2 50 85 AD’ (M )
Aggregate Supply ■LRv.s.SR P LRAS SRAS
Aggregate Supply ◼ LR v.s. SR P Y P Y LRAS SRAS
Shocks to aD ■ Introduction of atm MV= PY LRAS B SRAS A Y Y
Shocks to AD ◼ Introduction of ATM P Y LRAS SRAS Y − A B C MV PY =
Shocks to as a Only on Sras(change the cost of production) How to deal with adverse supply shock LRAS B C SRAS A SRAS AD Y
Shocks to AS ◼ Only on SRAS (change the cost of production) ◼ How to deal with adverse supply shock P Y LRAS SRAS AD Y − A SRAS’ B C
Shocks to as a When the economy suffers from adverse supply shock, policy makers have 2 choices Do nothing stagflation> back to normal 2. Increase ad to accommodate the shock → inflation
Shocks to AS ◼ When the economy suffers from adverse supply shock, policy makers have 2 choices 1. Do nothing → stagflation → back to normal 2. Increase AD to accommodate the shock → inflation
Shocks to as Change in oil price year change in p(%)CPI (% Unemployment rate 78 9.4 7.7 6.1 79 25.41.3 5.8 80 47.8 13.5 7.0 81 44.4 10.3 7.5 82 8.7 83 7.1 84 4.3 7.4 85 7.5 3.6 86 44.5 1.9 8718.33.6 6.1
Shocks to AS ◼ Change in oil price year change in p (%) CPI (%) Unemployment rate 78 9.4 7.7 6.1 79 25.4 11.3 5.8 80 47.8 13.5 7.0 81 44.4 10.3 7.5 82 -8.7 6.1 9.5 83 -7.1 3.2 9.5 84 -1.7 4.3 7.4 85 -7.5 3.6 7.1 86 -44.5 1.9 6.9 87 18.3 3.6 6.1
Shocks to as a Energy use(kg of oil equivalent per capita) country 99 00 O1 China 891.97 9O4.8 895.84 United states8066.018163.067996.04 year change in p (%o)CPI(%o) Unemployment rate 1994 -6.45 2.6 1995 6.96 4.8 1996 22.15 1997 728 2.3 1998 -37.22 443 1999 38.96 2000 65.56 3.4 3.4 2001 -16.06 8 2002 0.83 1.6 455 2003 21.39
Shocks to AS ◼ Energy use (kg of oil equivalent per capita) country 99 00 01 China 891.97 904.8 895.84 United States 8066.01 8163.06 7996.04 year change in p (%) CPI(%) Unemployment rate 1994 -6.45 2.6 4.9 1995 6.96 2.8 4.8 1996 22.15 2.9 4.6 1997 -7.28 2.3 4.2 1998 -37.22 1.6 4.2 1999 38.96 2.2 3.4 2000 65.56 3.4 3.4 2001 -16.06 2.8 4.7 2002 -0.83 1.6 5.5 2003 21.39 2.2 5.6
The Is-Lm model Classical model cannot explain the Great Depression ■LRv.s.SR a IS-"investment" and"savings LM---"liquidity" money' Takes the price level as exogenous and shows what determines national income
The IS-LM Model ◼ Classical model cannot explain the Great Depression ◼ LR v.s. SR ◼ IS --- “investment” and “savings” ◼ LM --- “liquidity” and “money” ◼ Takes the price level as exogenous and shows what determines national income
