Download Chapter 26 Appendix: Policy Disputes Using the Self

Chapter 26 Appendix: Policy Disputes Using the Self-Correcting
Aggregate Demand and Supply Model
LEARNING OBJECTIVES
Understand the difference between classical and Keynesian views of expansionary and
contractionary policies.
Step 1
Read the sections in your textbook titled “The Classical versus Keynesian Views of
Expansionary Policy” and “Classical versus Keynesian Views of Contractionary
Policy.”
*Step 2
Watch the Graphing Workshop “See It!” tutorial titled “Expansionary Gap.” Study the
difference between a passive and active approach to an inflationary gap.
Step 3
Read the Graphing Workshop “Grasp It!” exercise titled “Expansionary Gap.” This
exercise uses a slider bar to demonstrate how changes in aggregate supply or demand can
restore an inflationary economy to long-run equilibrium.
Step 4
Create a new graph at the Graphing Workshop “Try It!” titled “Expansionary Gap.”
This exercise illustrates the classical argument that the economy will self correct from an
inflationary gap to full-employment real GDP in the long run.
Step 5
Watch the Graphing Workshop “See It!” tutorial titled “Closing a Contractionary
Gap.” Study the difference between a passive and active approach to a recession.
*Step 6
Watch the Graphing Workshop “See It!” tutorial titled “ Contractionary Gap.” Study
how the federal government can increase aggregate demand using increased spending or
tax cuts to combat a recession.
Step 7
Watch the Graphing Workshop “See It!” tutorial titled “Monetary Policy with
Aggregate Supply.” Study how the Fed can increase the money supply to increase
aggregate demand to combat a recession.
Step 8
Read the Graphing Workshop “Grasp It!” exercise titled “Contractionary Gap.” This
exercise uses a slider bar to demonstrate how changes in aggregate supply or demand can
restore an economy in recession to long-run equilibrium.
Step 9
Create a new graph at the Graphing Workshop “Try It!” titled “Contractionary Gap.”
This exercise illustrates the classical argument that the economy will self correct to fullemployment real GDP in the long run.
The Result
Following these steps, you have learned that the classical or noninterventionist school of
thought believes that the short-run aggregate supply curve (SRAS) will self correct to
long-run full-employment real GDP on the vertical long-run aggregate supply curve
(LRAS). The Keynesian or interventionist view is that the fiscal policy and monetary
policy must be used to shift the aggregate demand curve to long-run full-employment
equilibrium real GDP on LRAS.
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