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Figure 5.3: Multi-Panel Analysis of a Negative Aggregate Demand Shock
Figure 5.3 provides a multi-panel illustration of the consequences of a negative aggregate demand shock, like a drop in business confidence, assuming no immediate policy intervention. The bottom panel, representing the multiplier model, shows that the shock triggers an initial decrease in output and employment. This decline is then magnified through the multiplier effect, leading the economy to a new, lower equilibrium at point B. Concurrently, the central panel, depicting the Phillips curve, shows that inflation also drops to point B. The upper panel, the WS-PS model, clarifies that the magnitude of this inflation decrease (e.g., one percentage point) corresponds directly to the size of the negative bargaining gap created by the shock.
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Figure 5.3: Multi-Panel Analysis of a Negative Aggregate Demand Shock
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Figure 5.3: A Fall in Investment and Aggregate Demand
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