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
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