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Manipulating AD and AS for Exogenous Shocks

Mr. Eric W. Breighton Underhill Permission to Use Scenarios given in the power point by : National Council on Economic Education, NY, NY. Manipulating AD and AS for Exogenous Shocks. What are Exogenous Shocks?.

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Manipulating AD and AS for Exogenous Shocks

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  1. Mr. Eric W. Breighton Underhill Permission to Use Scenarios given in the power point by : National Council on Economic Education, NY, NY Manipulating AD and AS for Exogenous Shocks

  2. What are Exogenous Shocks? • A demand side shock is a variable that is determined outside the model that affects aggregate demand. • A supply side shock is a variable that is determined outside the model that affects aggregate supply.

  3. Economic booms in both Japan and Europe result in massive increases in orders for exported goods from the United States • The increased orders for exports will cause more people to be hired and their increased income will result in increased consumer spending. • AD will Increase

  4. As part of its counter cycle policy, the government reduces taxes and increases transfer payments. • Q: What does this do to the AD Equation? • Q: What is a transfer Payment ? • Extend the model to incorporate an assumption.

  5. As part of its counter cycle policy, the government reduces taxes and increases transfer payments. • With increased discretionary incomes (not realized before the transfer payment increase) consumption by taxpayers will increase

  6. While the United States was in the midst of the Great Depression, a foreign power attached. Congress declared war and more than 1,000,000 soldiers were drafted in the first year, while defense spending was increased several times over. • The key points to understanding this application are embedded in the given scenario. • Identify the shift and explain the impacts that these shocks will have on the economy.

  7. While the United States was in the midst of the Great Depression, a foreign power attached. Congress declared war and more than 1,000,000 soldiers were drafted in the first year, while defense spending was increased several times over. • Consumption by the unemployed will increase due to increased defense spending and drafting. • Government spending will increase as well as its demand for goods and services system wide.

  8. Refer to Activity 27 • Work in Pairs on the Activity. • The goal: To understand how these shocks will affect the aggregate model through graphic analysis.

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