Employment, Inflation and Growth by A. W. PHILLIPS

By A. W. PHILLIPS

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The higher price lowers aggregate demand, and firms react by cutting back production, laying off workers, and moving the economy over to point C. At this stage the government may adopt a fiscal policy that shifts AD rightward to AD'. Care must be taken not to overstimulate and try to push the economy all the way back to the original LRASâ this response would create further price increases. 5 Reaction to a Supply-Side Shock The shock of higher energy costs shifts SRAS to SRAS' and LRAS to LRAS'.

Media Illustrations Example 1 All this frugality is producing a consumer-generated recession. What is needed is some policy action to stimulate consumer spending to move the economy out of its current lassitude. Consumer attitude surveys indicate that the time is ripe for such a move, and the high savings rate of recent years has led many economy watchers to predict an upturn. What is a consumer-generated recession? There has been a fall in consumer spending, decreasing aggregate demand and, through a contractionary multiplier process, causing a recession.

As we will see in chapter 9, this increase in money serves to increase aggregate demand through several channels. For example, a rise in the real supply of money causes its price, the interest rate, to fall. Lower interest rates, in turn, cause people to increase spending because borrowing costs have fallen. A fall in the price level causes an increase in aggregate demand. 1. 1 at the end of this chapter. Appendix A at the end of the book provides a more general overview of this curve and how it relates to other macroeconomic curves.

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