Graphical Integration of WS-PS and Multiplier Models (Figure 4.17)

Integrating the Phillips Curve with the WS-PS and Multiplier Model

Imagine an economy is in a state of equilibrium, with employment and output at sustainable, medium-run levels determined by the interplay between firms' pricing decisions and the wage-setting process. Suddenly, a widespread loss of business confidence leads to a sharp, sustained fall in private investment. According to a framework that combines the short-run effects of aggregate spending with the economy's medium-run supply capabilities, what is the most probable outcome in the short run?

Analyzing an Economic Boom

In an economic model that explains business cycles by combining demand-side fluctuations with a supply-side equilibrium, a positive shock to aggregate demand (such as a boom in consumer spending) will permanently raise the economy's equilibrium level of employment.

An economy is initially stable at its medium-run equilibrium. Suddenly, a wave of pessimism about the future causes a sharp drop in autonomous investment and consumption. According to a model that integrates demand-side spending effects with a supply-side equilibrium, arrange the following events in the correct chronological order to describe the resulting short-run downturn.

The Economy's Self-Correcting Mechanism

Short-Run vs. Medium-Run Effects of a Demand Shock

Match each state of the economy with its corresponding description within a framework that combines a demand-side spending model with a supply-side wage- and price-setting model.

According to a model that combines the supply-side determinants of medium-run equilibrium with the demand-side drivers of short-run fluctuations, the economy is considered to be in a recession when aggregate demand is insufficient to support the level of employment at which the bargaining gap is ____.

Evaluating a Fiscal Policy Response to a Recession

Analyzing an Economic Boom within the Integrated Model