Week 4 - The Transition to the Long Run

 

Last week we used the IS-LM model to analyze the effects of different policies in the short run. We were able to analyze the effects of fiscal and monetary policies on Output, interest rates, fiscal deficits and unemployment (which follows output). 

This week we explain the effects of these policies on prices.

Introducing prices into the model requires different analytical tools. In particular we will use what is called the Aggregate Demand-Aggregate Supply model. We will learn to obtain the Aggregate Demand curve from the IS-LM model. Once we know how to do that, we will be ready to re-visit the long run effects of fiscal and monetary policies in more detail.

We will see that some of the conclusions that we reached last week regarding the effects of fiscal and monetary policies will change when we focus on the long run.

 


To Do: