Lets Move or whatever

This neat graph

depicts the optimal
price level for the
equilibrium of the
Aggregate Supply and
Aggregate Demand
Both lines can be
moved by a number
of things
WOW
Things that shift the
AD Curve:
-Changes in
expectation
-Changes in Wealth
-Changes in stock
-Fiscal policy
-Monetary policy






Things that shift the AS curve:
-Change in resource availability
-Change in productivity (new technologies that allow faster production of things)
-Changes in expected price level (if suppliers plan on lowering prices in the future, they will want
to sell more at the current price now)





















Above we see examples of a recessionary and inflationary gap. In recessionary gaps, the EQ point is
below potential output. This means that there are less people employed as well. In inflationary gaps, the
EQ point is above potential output, while there is more unemployment, more resources are being used,
which is not good, as it puts a strain on the economy.

Monetary Policy

-Discount Rate ~ the rate the FED charges when it
makes loans to banks
If the FED lowers the discount rate, banks are
encouraged to borrow. increase in MS
If the FED increases the discount rate, banks
are discouraged to borrow. decrease in MS

-Reserve Requirement ~ how much a bank is
required to hold
Lower reserve requirement = increase in MS
Higher reserve requirement = decrease in MS

-OMOs buying/selling Treasury bonds
Selling govt bonds decrease the MS
Buying govt bonds increases the MS
Fiscal Policy

Contractionary:
- Increasing taxes
- Reducing govt spending
- Reducing govt transfers

Expansionary:
- Decreasing taxes
- Increasing govt spending
- Increasing govt transfers


All of these work to manipulate the money supply because when the money supply increases, aggregate
demand increases. Just as when money supply decreases, demand decreases.
Think of it this way: when you have more money, you want to buy more things
Shifts in the MD curve
Change in the agg. Price level When things cost more, people
need more money in hand right shift. When things cost less,
people dont need as much money in hand left shift
Change in Real GDP Increase in GDP, the increase of total goods
and service also sees an increase in the need for money right
shift. Fall in GDP sees a left shift
Change in technology Advances in technologies cause leftward
shifts because the use of cards in place of money reduces the
need of tangible dollar bills
Changes in institutions If banks can change regulations, they
can shift the curve. If they can pay interest on checkable funds,
the curve shifts right.
The MS curve is shifted by buying/selling bonds or OMOs or Monetary Policy

Shifts in demand changes in opportunities when something is
prospected to do good, more loans are wanted so there is a right
shift, when its expected to do bad, or fails, demand shifts left,
change in govt borrowing when the govt has money, there is a
greater demand for loans.
Shifts in supply - Private savings behavior if people have money
and feel good about it, they spend more and save less. The lack
of savings ( or deposits in the bank) prevent banks from having
loans to sell, shifting the curve to the left.