00:01
We want to explain the short -run and long -run effects of three different government policies on the economy.
00:08
The first is an increase in taxes.
00:12
The increase in tax would decrease consumption, and since consumption is part of aggregate demand, we'd see aggregate demand decrease from ad1 to ad2.
00:25
That would make prices go down to p2, but would also make output go to y2, and increase unemployment.
00:33
In other words, we'd have a recessionary gap.
00:37
But in the long run, the unemployed workers would begin to accept lower wages, which would reduce the cost of an important input, labor, and that would shift our short -run aggregate supply curve from aggregate supply one to short -run aggregate supply two.
00:58
So in the end, the economy always in the long run comes back to potential output, but in this case, when we had the decrease in aggregate demand, we end up at a lower price level.
01:13
And the recessionary gap is gone and prices are lower.
01:19
The other two policies have the same effect of an aggregate demand.
01:23
One is monetary policy that increases the money supply.
01:29
This would lower interest rates, which would make the investment part of aggregate demand increase...