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Adjustment Dynamics

adjusting - over time, equilibrium shifts back to natural level of output  

  • increase in real money stock (M)
  • no M component in AS (no shift in short run)
  • increase in M >> shifts AD to the right
  • must go back to natural level of output >> AS shifts up until intersection at Yn again
  • by equation Y = Y(M/P, G, T), increase in M results in a proportional increase in P of equal magnitude (over time, Y would be constant)

 

  • neutrality of money - changing nominal money only affects change in price level
    • in medium run, output and interest rate stays constant
  • cannot sustain changes in output (only temporary)
    • shock - changes to the economy in short run
    • propagation mechanism - how economy shifts after a shock (mostly in recovering the natural order of things)
  • M/P = Y L(i)
    • to keep Y, i constant, P proportionally increases by whatever amount M increases

 

  • decrease in deficit (less G)
  • AS curve not shifting in short run
  • less G >> AD relation shifts to the left
  • AS curve shifts down in medium run to restore Yn
  • unlike w/ M, changes in G affect the interest rate

 

  • taking Yn = C(Yn-T) + I(Yn,i) + G:
    • in medium run, Y stays constant
    • so change in G must be balanced by change in interest i (the only thing left that can change)
    • unlike money market, has no P component to take away need for change in interest
  • w/ G decrease, I (investment) must increase >> interest decreases
Subject: 
Economics
Subject X2: 
Economics

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