Econ 8.5

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Econ 8.5

  1. 1. 8.5: Some final observations Chapter 8: Aggregate demand and aggregate supply
  2. 2. CONTENT <ul><li>Business cycle and government policies in neoclassical and Keynesian perspectives. </li></ul>
  3. 3. NEOCLASSICAL PERSPECTIVES <ul><li>The economy is a stable system where it trends toward long-run equilibrium (full employment). </li></ul>
  4. 4. <ul><li>Still, in short-run, economy can fluctuate (recessionary and inflationary gap). </li></ul><ul><li>But the trend is still go back to the equilibrium withouth government’s intervention. </li></ul>
  5. 5. <ul><li>Therefore in short-run, government should encourage competetion so that resource and prices can be influenced by price mechanism (demand and supply). </li></ul><ul><li>It means to allow the economy to automatically shift back to equilibrium. </li></ul>
  6. 6. <ul><li>Now the aim of neoclassical economists is to achieve economic growth in long run. </li></ul><ul><li>So they should apply supply-side policies to increase the long-run supply. </li></ul>
  7. 7. Keynesian perspective <ul><li>The economy is an unstable system where short-term fluctuation cannot automatically correct themselves. </li></ul>
  8. 8. <ul><li>Therefore government must actively use policies to influence aggregate demand. </li></ul><ul><li>For example, during recessionary gap, government must use policy to boost the aggregate demand. </li></ul>
  9. 9. <ul><li>If there are no intervention done by the government, the economy will remain stuck at prolonged low levels of GDP and high unemployment. </li></ul><ul><li>Inflationary gap happens only when the aggregate demand curve is increased to the upward sloping and vertical portion of the Keynesian aggregate supply. </li></ul>

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