Chapter 31 — Key Takeaways
The AS-AD model
- AD slopes down: wealth effect + interest rate effect + exchange rate effect
- SRAS slopes up: sticky wages make output respond to price level in the short run
- LRAS is vertical at potential output: determined by resources, technology, institutions
- Equilibrium: where AD crosses SRAS; price level and real GDP determined
Analyzing shocks
| Shock | Price level | GDP | Example |
|---|---|---|---|
| AD right | Rises | Rises | Fiscal stimulus, rate cuts |
| AD left | Falls | Falls | Financial crisis (2008) |
| SRAS left | Rises | Falls (stagflation!) | Oil shocks (1970s), COVID supply |
| SRAS right | Falls | Rises (best outcome) | Tech boom, productivity gains |
COVID was AD-left AND SRAS-left simultaneously → GDP collapsed; price effect was ambiguous until demand recovered faster than supply → inflation.
Keynesian vs. classical
- Classical: self-correction works; intervention unnecessary
- Keynesian: self-correction is too slow; intervention speeds recovery and reduces suffering
- Honest synthesis: aggressive intervention in deep recessions; restraint when near potential
Themes
- Disagreement — the Keynesian-classical debate is the central macro divide
- Tradeoffs — intervention risks inflation; inaction risks prolonged unemployment