The aggregate supply indicates how many goods companies want to offer at a certain price level. The aggregate demand describes how many goods are in demand at a certain price level. At the intersection of both curves, total supply and demand coincide: the equilibrium of production- and price- level.
The intersection of the long-term supply curve and the aggregate demand curve represents the long-term equilibrium of the economy. If the short-term supply curve also passes through this intersection, then expectations, wages and prices have fully adjusted to the long-term equilibrium. This situation is illustrated in the figure above. There are basically two types of shocks, supply shocks and demand shocks, each with either a positive or negative development. Analogously, two policies are being analyzed in this framework: monetary and fiscal policies, which can be either expansive or restrictive. Also, fiscal policy acts either on the supply or the demand side.
Wirkung | Effekt | Beispiel | |
Positiver Angebotsschock | GA nach unten/rechts Y steigt, P fällt | Technischer Fortschritt, sinkende Energiepreise | |
Negativer Angebotsschock | GA nach oben/links Y fällt, P steigt | sprunghaften Anstieg der Produktionskosten, Rohstoffpreisanstieg, Ölkrise | |
Positiver Nachfrageschock | GN nach oben/rechts Y steigt, P steigt | Aktienboom | |
Negativer Nachfrageschock | GN nach unten/links Y fällt, P fällt | Wirtschaftskrise im Ausland (Exporte sinken) | |
Supply-oriented fiscal policy represents the change in taxes, fees and subsidies through which the state can influence the costs and profits of companies and thus the aggregate supply.
Monetary policy means the regulation of the money supply or the short-term interest rate by the central bank. The respective central bank or agency can apply minimum-reserve-, refinancing- and open-market- policies, the latter being the most important. Also at its disposal are regulatory measures, foreign exchange transactions or, in extreme cases, restrictions on capital movements. In open-market operations, the central bank increases or decreases the money supply by buying or selling bonds. In the first case, the money supply is increased with decreasing interest rate level. In the second case, the money supply is reduced with increasing interest rate level. In the ASAD- model, monetary policy primarily affects aggregate demand. An expansive monetary policy (increase of money supply, decrease of interest rates) shifts the aggregate demand curve to the right. In contrast, a restrictive monetary policy (contraction of the money supply, increase of interest rates) acts like a negative demand shock and shifts the demand curve to the left.
| Wirkung | Effekt | Beispiel |
Expansive Fiskalpolitik, angebotsseitig | GA nach unten/rechts Y steigt, P fällt | Senkung der Unternehmenssteuern, laxere Umwelt- und Arbeitsschutzmaßnahmen, Reduzierung des Kündigungsschutzes |
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Restriktive Fiskalpolitik, angebotsseitig | GA nach oben/links Y fällt, P steigt | Stärkere Auflagen und Regulierungen, Steuererhöhungen |
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Expansive Geldpolitik / Expansive Fiskalpolitik, nachfrageseitig | GN nach oben/rechts Y steigt, P steigt | Geldmenge steigt, Zins fällt / Höhere Staatsausgaben, Steuersenkungen |
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Restriktive Geldpolitik / Restriktive Fiskalpolitik, nachfrageseitig | GN nach unten/links Y fällt, P fällt | Geldmenge fällt, Zins steigt / Sparmaßnahmen, Austerität, Steuerhöhung |
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There are now four non-exclusive policy options:
In the case of the oil price shocks in the 1970s, stimulative monetary and fiscal policies from 1975 onward helped to overcome the recession faster than otherwise would have been the case, albeit at the cost of higher inflation. By contrast, the ECB nowadays is only committed to stabilizing price levels, so that today there would be a conflict between policy measures.
An example of a negative shock to aggregate demand are the consequences of September 11 in 2001 in the USA, which also coincides with the aftermath of the bursting of the dotcom-bubble. The latter led to large losses of wealth of households and, as a consequence, to a collapse of demand. The former led to increased precaution- and saving- behavior. Both effects significantly dampened aggregate demand. (Left shift of the AD curve, falling GDP and falling price level).Monetary policy response: The FED under Allan Greenspan lowered the interest rates significantly and flooded the markets with fresh central bank money to prevent the markets from collapsing completely. Critics call this a "Greenspan put," since these measures, similar to a put-option, reduce the risk of falling stocks. As a result, the low interest rates fueled, in particular, the real estate market and are now considered one of the main causes of the 2008 real estate market crisis. However, in 2000 and 2001 they actually helped to dampen the negative effects of the crisis (positive boost of aggregate demand). Fiscal policy also reacted expansively to the consequences of 9/11 and massively increased government spending. While the US government budget still showed a surplus of 200 billion in 2000, it was in deficit by 160 billion in 2002. A large part of the additional government spending went into the military budget to prepare and finance the war in Iraq. In addition, further very high government expenditure went to internal and external security. These measures also have a positive effect on aggregate demand (besides the official task) and counteract the negative demand shock.
Military budget, just like public medical care and most of the education sector, is one of the areas in which the crowding-out effects are very low. Hence, from an economic point of view investments there are an efficient crisis management strategy. In the education sector, however, the multiplier effects would have been much higher in the long term, therefore investments in this sector would have been preferable from an macroeconomic perspective.