00:01
So here we're told that the economy is in recession and that there needs to be an increase in aggregate demand.
00:07
So we know that we are thinking about aggregate demand, aggregate supply.
00:12
So let's just draw aggregate demand, aggregate supply to get us started, right? prices, output, we know there's some potential output.
00:21
And we know further that the economy is currently operating over here somewhere, right? the economy is in recession.
00:29
The intersection of aggregate demand and aggregate supply is giving us less output than, oh, sorry, i completely reversed these.
00:39
Sorry, i haven't had my coffee yet.
00:42
Aggregate supply, aggregate demand.
00:44
We've got this problem, right? the equilibrium is less than potential output, so the government would like to do something.
00:51
To think about what the government can do, we should remember that aggregate supply represents firms pricing decisions, how much price they need to produce certain amounts of output, right? if you tell firms that were prices are low, firms are not going to want to produce much.
01:07
If you tell firms prices are high, they'll want to produce a lot.
01:10
Aggregate demand is equal to my c plus i plus g plus nx.
01:15
That's my four sources of aggregate demand.
01:18
And the key thing here from this perspective is that government is in the aggregate demand, right? so fiscal policy affects aggregate demand.
01:28
When the government is spending or taxing, those are things that shift the aggregate demand curve, not the aggregate supply curve.
01:37
So there needs to be an increase in aggregate demand, absolutely, right? if the government could increase aggregate demand to here, right, we could shift this curve out, we could move to this equilibrium, we could close the recessionary gap.
01:54
Increase output back to full employment equilibrium.
01:57
So the increase in aggregate demand here will increase output, but it will also increase prices, right? if we shift that aggregate demand curve out by spending more g, we're going to run into higher prices as well.
02:15
So that's the trade -off the government faces, right? a is wrong.
02:20
A is wrong because you can't do both.
02:22
Government, sorry, this is a really word, really worded question...