1. Economic Policy and the Aggregate Demand-Aggregate Supply Model
AP Economics
Mr. Bernstein
Module 20:
Economic Policy and the Aggregate Demand-Aggregate Supply Model
March 12, 2015

2. AP Economics Mr. Bernstein
Economic Policy and the Aggregate Demand-Aggregate Supply Model
Objectives - Understand each of the following:
How the AD-AS model is used to formulate macroeconomic policy
The rationale for stabilization policy
Why fiscal policy is an important tool for managing economic fluctuations
Which policies constitute expansionary fiscal policy and which constitute contractionary fiscal policy

3. AP Economics Mr. Bernstein
Stabilization Policies vs. Self-Correcting
Many economists believe
government should enact
policies to reduce the
severity of recessions and
limit the excesses of
expansions, expediating
the return to full
employment and stable prices

4. AP Economics Mr. Bernstein
Policy in the Face of Demand Shocks
Negative Demand Shock
Causes Recessionary Gap
Prices fall
Unemployment rises
Policies to increase AD
Reduces recession length
Examples?
Positive Demand Shock
Policies to combat p

5. AP Economics Mr. Bernstein
Policy in the Face of Supply Shocks
Negative Supply Shock
Creates policy dilemma
Prices rise…and
unemployment rises
Policies to increase AD
Help jobs but inflames p
Policies to reduce AD
Reduces p but hurts jobs
Difficult to influence AS