Hi!

We have arrived at the end of the basic description of the model

of aggregate demand and aggregate supply. We have presented
the basic feature of that model with its three curves.
Then we have described the long run and the short run equilibria.
And then we have seen how the shifts in both the aggregate demand
and the short run aggregate supply
can move the economy into short run equilibrium but out from
a long run equilibrium. In those cases, we will have that both GDP and
unemployment are not in their long run level.
But at some point, an adjustment occurs.
One possibility is that the unusual levels of
unemployment produce a change in nominal wages
that induce a shift in the short run aggregate supply.
Another possibility is that the government or, as we will see,
the central bank decides to implement a policy to shift the
aggregate demand. In one way or another, the long run equilibrium
is restored. The fact that the government or the central bank
can change the aggregate demand opens the room for a very important question.
Can they systematically implement policies to prevent a
recession or, at least, to minimize its costs?
In the next lecture, we will try to answer this question.
The central bank has a very important potential role in fighting
the effects of recessions because monetary policies can have
relevant effect on real variables in the short run.
In general, one of the goals of central banks
is related to keeping unemployment low because, as we will see,
changes in the quantity of money can produce changes in the aggregate demand
and, therefore, changes in production and employment levels.
The analysis of the mechanism of monetary policies to smooth
recessions will be the first main topic of the next lecture.
For many economists, fiscal policies to prevent or minimize
recessions are also possible. But there is an open debate about
their precise effects and their costs. An advantage of the fiscal policies
is that there is a multiplier effect that magnifies
the initial incentives generated by the government.
A disadvantage is that there is a crowding-out effect that
dilutes some of their impacts. We will analyse both.
We will close our course with a debate of the advantages and shortcomings
of fiscal and monetary policies. We are very close to the end
of our course. I hope we see each other for the last lecture.