HIS109Y1 Lecture Notes - Lecture 15: Stagflation, Demand Shock, Potential Output
Document Summary
8. 11: when price level changes, we can talk about inflation, expectations are huge in macroeconomics as they can change how people behave and spend. It is a leftward shift on ad, you end up where real gdp has fallen below. If you are in the yes camp prices quickly adjust to move the economy back to potential gdp: you"re i(cid:374) a recessio(cid:374) (cid:894)u(cid:374)e(cid:373)ploy(cid:373)e(cid:374)t(cid:895). If (cid:373)arkets work perfectly, unemployment is an excess supply of labour. When there is excess supply: there is a surplus causing prices to fall. Wage rate is going to fall: what happens when wages fall, opposite of opec, sas shifts to right and moves us back closer to potential gdp. If there is a recession and people are not spending (real gdp is falling), in the yes story, the money is going to the banks and loanable funds market. In loanable funds market, pessimistic expectation may decrease investment spending.
