Transcript Gli shock di domanda: l`aumento dell`offerta di moneta e la riduzione

Applications of the AD-AS Model
Lecture 15 – academic year 2013/14
Introduction to Economics
Fabio Landini
Where we are…
Well, at the end….
•Lectures 1-7: Microeconomics (S&D, regulation,
taxes, social efficiency)
•Lecture 8-14: Macroeconomics (aggregates,
goods mkt, financial mkt, labour mkt, AD-AS)
Today: Demand shocks
How do we model the transition from the short to
the medium period in the AD-AS model?
What happens in the medium period when we
increase the supply of money?
What happens in the medium period when we
reduce the public deficit?
Which are the effects of demand shocks?
Demand shocks
• Transitions from short to medium period
• Effects of an increase in money supply
• Effects of a reduction in public deficit
• Effects of a demand shock
Transition from the short to the medium period
P
AS
A
PA
AD
YA =Yn
Y
Point A can be both the short and the medium period
equilibrium depending on the assumptions on PE
Medium period PE=P -> u=un -> Y=Yn
Transition from the short to the medium period
P
AS
A
PA
AD
Yn
YA
Y
In the short period -> PE can be ≠ from P
For instance PE<P -> YA>Yn
How do we move from the short period equilibrium A to
the medium period equilibrium?
Transition from the short to the medium period
Individuals underestimates prices -> they have
wrong expectations concerning prices
As times passes workers realize that PE is too
low -> price expectations adjust -> PE
AS parametrically depends on PE -> If PE the
AS curve shifts upward
PE -> AS shifts upward
AS’
P
AS
A’
PA’
PA
A
AD
Yn
YA’
YA
New equilibrium A’ -> Y (YA -> YA’) P (PA -> PA’)
PE -> A -> A’; Is A’ the final equilibrium of the system?
In A’ -> Y>Yn and P>PE -> PE continues
AS’
P
AS
A’
PA’
PA
A
AD
Yn
YA’
YA
PE -> A -> A’; Is A’ the final equilibrium of the system?
In A’ -> Y>Yn and P>PE -> PE continues
AS’’
AS’
AS
P
A’’
PA’
A’
A
PA
AD
Yn
YA’ YA
In A’’ -> Y=Yn -> PE=P -> the expectation must not be adjusted ->
the adjustment process (i.e. the AS curve) stops
Demand shock
We use the AD-AS model to examine:
•Expansive monetary policy
•Reduction of public deficit
The two cases are examples of “demand shock”
Expansive monetary policy
1) Expansive monetary policy ( MS)
Initially, let’s assume Y = Yn
Then, the Central Bank increases MS
What are the short-period effects on equilibrium
prices (P) and quantities (Y)? An what about the
medium-period effects?
Expansive monetary policy
AS -> P= PE (1+m) F( 1 - Y , z)
L
+
 MS

AD -> Y  Y
, G, T 
 P



+ + -
MS -> Aggregate demand -> AD shifts rightward
AD -> AD’ -> Equilibrium -> A -> A’ -> Y (YA -> YA’) P
(PA -> PA’)
Short period effects -> Y and P
Is it plausible that the economy remains in A’?
In A’ Y>Yn -> P>PE -> wrong expectations
P
AS
A’
PA’
PA
A
AD
YA=Yn
YA’
AD’
Y
Expansive monetary policy
Wrong expectations -> adjustment of expectations
(described before) -> PE
PE -> AS shifts upward
The adjustment process continues until Y>Yn -> AS
shifts upwards until Y>Yn
When Y=Yn -> PE=P -> The adjustment process
interrupts -> medium period equilibrium
After MS we are in A’; AS shifts upward until Y>Yn
AS’’
P
AS
PA’’
A’
PA’
PA
AD
YA’’= Yn
YA’
AD’
Y
During the transition -> Y and P
In the medium period -> YA’’ =Yn=YA and PA’’ >PA
Expansive monetary policy
Total effect of the intervention:
•Short period -> Y and P
•Transition -> Y and P
•Medium period -> Y=, P
In the medium period Y does not change. Has the
composition of demand changed (Z=C+I+G) ?
•Z does not change (in equilibrium Y=Z):
•C hasn’t change (Y and T are not changed)
•G has not changed (exogenous)
•Therefore I hasn’t changed either
In the medium period money has no effects on real
variables but only on prices -> medium period “neutrality”
of money
Expansive monetary policy
An expansive monetary policy increases production in the
short period -> It allows the economy to exit a recession(
Y)
In the medium period monetary policy in neutral ->
It cannot be relied on to generate permanent increases in
production
Reduction of public deficit
2) Reduction of public deficit ( G , T)
Initially, let’s assume Y = Yn
Then, government reduces G
What are the short-period effects on equilibrium prices (P)
and quantities (Y)? An what about the medium-period
effects?
Expansive monetary policy
AS -> P= PE (1+m) F( 1 - Y , z)
L
+
 MS

AD -> Y  Y
, G, T 
 P



+ + -
G -> AD shifts leftward
Equilibrium A->A’ -> Y (YA -> YA’) P (PA -> PA’)
In A’ Y<Yn -> P<PE -> PE -> the transition starts
P
AS
A
PA
PA’
A’
AD
AD’
YA’
Yn
Y
PE -> AS shifts downward
When Y=Yn the adjustment process stops
P
AS
AS’’
A
PA
PA’
PA’’
A’
A’’
AD
AD’
YA’
Yn=YA’’
Y
During the transition -> Y and P
In the medium period -> YA’’ =Yn=YA and PA’’ <PA
P
AS
AS’’
A
PA
PA’
PA’’
A’
A’’
AD
AD’
YA’
Yn=YA’’
Y
Reduction of public deficit
Total effects of the intervention:
• Short period -> Y P
• Transition -> Y P
• Medium period -> Y= P
Is the composition of demand changed (Z=C+I+G) ?
• Z is not changed (in equilibrium Y=Z)
• C is not changed (Y and T are not changed)
• G is changed (Government has reduced expenditure)
• Therefore I has increased
Reduction of public deficit
In the short period a reduction of public expenditure
causes a recession
The effect is only temporary -> In the medium period
the production comes back to the “natural” level
In the short period the reduction of public deficit has
an ambiguous effects on investments
In the medium period the effect on investment is
certainly positive
Conclusion
The cases that we examined are examples of demand shock
Demand shock -> Variations in the values of variables that
affect aggregate demand
Demand shock:
•Variations in public expenditures and taxes
•Variations in money supply (and related interests)
•Variations in autonomous consumption (tastes, consumers’
expectations)
•Variations in investments (firms’ expectations)
Conclusion
Demand shocks impact the AD curve
Positive shocks ( MS, G, C0, I0) -> AD rightward
Negative shocks ( MS, G, C0, I0) -> AD leftward
P
AS
AD’
AD
Y
Conclusion
In the short period demand shocks impact on prices and
production in the same direction ( P Y or P Y)
Moreover, we saw that in the medium period:
• In all cases Yn does not change -> Demand shocks do
not influence production in the medium period
• In all cases P change -> Demand shocks affect prices in
the medium period
• Demand shock can change the composition of
aggregate demand in the medium period