10 questions on "Aggregate Demand and Aggregate Supply - Macroeconomic Policy"

Reminder: what is self correcting in the long run?
The economy in the long run will eventually trend back to the potential output
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How long could the process of self correction take?
It coukd take a decade or more
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What is bad about the aggregate output being below the potential output?
The economy can suffer an extended period, of depressed aggregate output, and high unemployment before it returns to normal
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What should the government use to get the economy back potential opt in the aftermath of  a sift of the aggregate demand curve?
The government should use monetary and fiscal policy
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What do we call it when the government uses government policy to reduce the severity of recessions and rein in excessively strong expansions.
We call it stabilization policy.
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Can stabilization policy improve the economies performance? How?
Yes it can.
through fiscal and monetary policy to bring the aggregate output to its potential output.
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What could be a reason for fiscal policy not occurring in a country if that country has the ability to use those policies?
Political constrains on fiscal policy
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What happens of the government acts to increase the aggregate demand in order to limit the rise in unemployment?
It reduces the decline in output but causes even more inflation
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Can we use macro policy to respond to supply shocks?
No, because macro policy cannot respond to supply shocks, because it cannot easily affect producers' profitability and compensate for shifts of the SRAS curve.
So macro policy cannot shift simply push the curve that shifted back to its original position
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What are the two negative side effects of trying to fix a supply shock using macroeconomic policy?
  • A fall in aggregate output leading to a rise in unemployment
  • A rise in the aggregate price level
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