Wholly Macro

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MACROECONOMIC SHOCKS : INSUFFICIENT DEMAND CASES

Chapter 11 of Wholly Macro starts off by explaining the different cases of insufficient demand . The writer starts off by explaining that aggregate demand (APE ) may drop because of three reasons less household expenditure , less government purchase of domestic produce and reduction in demand of U .S products outside

Next the writer explains how recession is caused by demand . When the APE decreases and becomes less than the GDP , there is excess produce . This

means supply or ASF is now more and hence funding goes towards financing the excess produce . This funding will always be equal to the supply and hence , no price adjustment is requires . This situation will ultimately force producers to reduce the people employed as well as the output This move will again increase ASF and reduce the GDP and APE and will then affect the interest rate as well which will decrease . All this will make the three components (i .e . APE , GDP and the ASF ) equal but on the other hand will generate negative economic profit . Once the prices rise and eliminate the negative profit , the prices will then become stable until the next shock change

The writer then moves on to the second cause of recession . When the ASF will fall it will cause the M x V to fall as well . This could be due to a fall in V , M or both . If the above 3 components are...