00:02
So our economy starts off in equilibrium at potential output, e1, and on aggregate demand curve 1 and short run aggregate supply 1 at price p1.
00:16
But then there's an oil shock.
00:19
The price of oil goes up, and that affects the output of pretty much everything.
00:24
And it shifts our short run aggregate supply curve up to short run aggregate supply 2 and changes our equilibrium.
00:32
To point e2.
00:35
Prices are higher and our output goes down to y2, which is below potential output.
00:42
So it means we have both unemployment and inflation.
00:47
And then we want to know, and this is called stagflation, and then in part b, we want to know what kind of monetary and fiscal policy could the government use to address the problem.
01:01
So if the government, the government, government decides that unemployment is the worst problem, then the policy should be to increase aggregate demand with lower taxes, increase government spending, or an increase in the money supply.
01:18
So if we do increase aggregate demand to ad2, then our new equilibrium, e3, is back at potential output...