ECON 2035 Lecture Notes - Lecture 10: Aggregate Supply, Output Gap, Aggregate Demand
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Document Summary
Essentially they want to have as small of an output gap as possible. There are three categories of economic shocks: demand shocks, temporary supply shocks, permanent supply shocks, note: with demand and permanent supply shocks policymakers can simultaneously pursue price stability and stability in economic activity. With a temporary supply shock, policymakers can either go after one or the other. The argument between the two sometimes involves what is known as lags. Monetary authorities can target any inflation rate in the long run with autonomous monetary policy adjustments. Potential output is independent of monetary policy (this also means that the quantity of aggregate output produced in the long run is independent as well) Cost-push inflation occurs when a temporary negative supply shock or when workers push for higher wages beyond what is justifiable. Demand-pull inflation occurs when policymakers are pursuing policies that increase aggregate demand. The graphs are the essential thing to you understanding this.