Friday, July 12, 2013

Aggregate supply and aggregate demand curves during the Great Recession

Following this post, I show the AD (blue) and AS (red) curves (with 5% shifts shown as dashed lines) quarterly from 2008 to 2012:

Again, I'm not sure if this is what the model is showing, but it appears that in 2008 Q3, the economy screamed out for looser monetary policy. The supply curve went horizontal and the demand curve became unresponsive to boosting AD. After the crisis hits, the economy appears to call for either fiscal or monetary stimulus, with monetary stimulus being better dollar for dollar. But I must emphasize that this is speculation at this point.

1 comment:

  1. Note that in 2008 Q3 a 5% increase in the monetary base leads to only a ~1% increase in the price level and a ~5% increase in equilibrium NGDP (which is a 4% increase in RGDP, and thus only a 1.04/1.05 ~ 1% decrease in the real value of a dollar). Increasing the monetary base in 2008 Q3 would have been almost pure increase in RGDP.

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