00:01
So here we've got a story about an aggregate demand, aggregate supply model.
00:04
As always, that means that we're telling a story about prices and output.
00:08
Aggregate demand is downward sloping, aggregate supply is upward sloping, and then we have an ad going left shock.
00:16
So aggregate demand here is going to shift to the left, decreasing output.
00:22
This is a problem, right? so we're told that fiscal policy here is trying to reverse the change in output, right? we started from some original output level.
00:32
And what fiscal policy wants to do is to shift aggregate demand back, wants to push aggregate demand back to the right.
00:41
So which of these is wrong? we are worried in particular here about if by the time policy has implemented, the economy has moved back to long run equilibrium.
00:56
So long run equilibrium will involve price adjustment, right? the way that this model gets to equilibrium is like how any market gets through equilibrium is price adjustment.
01:08
At red levels of output, the economy is running cold, inventories are building up on shelves, unemployment is high.
01:14
That gives firms ability to start cutting prices, right? firms can start paying less to labor, and firms are also forced to cut prices to get their products off shelves.
01:24
So aggregate supply in the long run is going to shift down to here...