AP Economics
Mr. Bernstein
Module 20:
Economic Policy and the Aggregate
Demand-Aggregate Supply Model
March 2016
AP Economics
Mr. Bernstein
Economic Policy and the Aggregate DemandAggregate 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
2
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
3
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
4
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
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