Macroeconomics

In this chapter the last three cases were presented and looked at. The three external shocks include a decrease in ASF, a decrease in APE, and an increase in GDP. These three shocks all will have an insufficient amount of demand for supply of goods and services. In other words APE will be less than GDP.

One case includes a demand caused recession. This shock is triggered by a decrease in aggregate demand. There could be a few different causes for APE to drop. One reason could be because of a reduced business and household demand. Another reason could be because of the reduced need the foreigners have for U.S. products or supplies. When APE falls, firms will try to wait the situation out to see if demand for their products will come back. If it doesn’t come back the output-price adjustment will take place and all output, prices, employment, and interest rates will decrease until GDP=APE=ASF.

Another case consists of money and credit caused recession. This case involves a decrease in the supply of funding. If ASF falls the nation will have an insufficient amount of funding and they won’t be able to support the levels of GDP and APE. As the nation pushes for more loans from all the credit sources that along with a boost in interest rates will force ASF to rise. Because of this APE will fall as ASF and interest rates continue to rise until APE=ASF. After this process output and employment will be down, while interest rates will see an increase. All of the levels will remain at their new levels until an economic shock takes place again.

Cost push inflation is another case where the widespread increases in businesses’ operating cost impacts the different levels. In this case because of the widespread increase in production cost, the levels of output and employment will fall while prices and interest rates increase. Once this process occurs there will be an increase in prices and they will remain up causing inflation. After that...