Economic Policy and the Aggregate Demand-Aggregate Supply Model

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Economic Policy and the Aggregate Demand-Aggregate Supply Model AP Economics Mr. Bernstein Module 20: Economic Policy and the Aggregate Demand-Aggregate Supply Model March 12, 2015

AP Economics Mr. Bernstein Economic Policy and the Aggregate Demand-Aggregate Supply Model Objectives - Understand each of the following: How the AD-AS model is used to formulate macroeconomic policy The rationale for stabilization policy Why fiscal policy is an important tool for managing economic fluctuations Which policies constitute expansionary fiscal policy and which constitute contractionary fiscal policy

AP Economics Mr. Bernstein Stabilization Policies vs. Self-Correcting Many economists believe government should enact policies to reduce the severity of recessions and limit the excesses of expansions, expediating the return to full employment and stable prices

AP Economics Mr. Bernstein Policy in the Face of Demand Shocks Negative Demand Shock Causes Recessionary Gap Prices fall Unemployment rises Policies to increase AD Reduces recession length Examples? Positive Demand Shock Policies to combat p

AP Economics Mr. Bernstein Policy in the Face of Supply Shocks Negative Supply Shock Creates policy dilemma Prices rise…and unemployment rises Policies to increase AD Help jobs but inflames p Policies to reduce AD Reduces p but hurts jobs Difficult to influence AS