ECON 2 Lecture Notes - Lecture 2: Output Gap, Money Supply, Government Spending
7 Nov 2016
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Document Summary
Economy always produced at yf (full employment gdp) due to complete flexibility of wages/prices/interest rates. Any deviations from yf were only temporary. No need for any government intervention (laissez faire) to restore the economy to yf. Economic adjustments to yf via aggregated supply curve (as curve) During this period of time, the economy was seen quite similarly to the human body during a time of sickness. Put simply, if you have a cold, you don"t necessarily need to go to the emergency room. Your own immune system handles the issue and you are eventually restored. In classical economic terms, deviations will always sort themselves out. The labor market would be soft (high rate of unemployment). The as curve shifts to the right as it increases, until the recessionary gdp gap is closed. Before the great depression, the average waiting time for the recessionary gdp gap to close was about 6 weeks.
