Aggregate Demand-Aggregate Supply

M*

Md

M

r AE

Y

Y

P

Ms

AE

Y=AE

AD

AS

P*

Y*

Y*

r*

Y**

Y**

r**

P**

r***

M**

Y

Y

Overall:Increase MS from M* to M**Decrease r* to r***Increase Y* to full employment YIncrease Prices from P* to P**

Historical Recessions

• 1973 Oil Embargo– Quadrupling of oil prices (Negative Supply Shock)

• Spending on War– Positive Demand Shock

• Stock market crash– Negative Demand Shock

• Which shock drove the recession?

Historical Recessions

• 1981-82 Recession– Small recession in 1979 due to energy crisis– Iran limited oil exports, increasing price– Negative Supply Shock

• Savings and Loan Crisis– Problems in the mortgage market– Negative Demand Shock

• What was the overall outcome?

Historical Recessions

• 1990-91 Recession– 1990 Oil Price Increase (Negative Supply Shock)

Historical Recessions

• 2001 Recession– Dot-Com Bubble– 9/11 Attacks– Both (Negative Demand Shocks)– Expectation?

Great Recession

• Housing Market Crash

Great Depression

Great Depression