Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Check you progress:
1. Define Adverse Supply Shock. 
2. Define Stagflation. 
3. Define Inflation.
4. Explain Phillips Curve. 
5. Explain Vertical Long 
– run Phillips.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9.9 SUMMARY 
 
1. The aggregate supply and demand model is used to show the 
determination of the equilibrium levels of both output and 
prices. 
2. The aggregate demand schedule, AD, shows at each price 
level the level of output at which the goods and assets 
markets are in equilibrium. This is the quantity of output 
demanded at each price level. Along the AD schedule fiscal 
policy is given, as is the nominal quantity of money. The AD 
schedule is derived using the IS-LM model. 
3. The real balance effect lead to shift of IS curve to the right. As 
a result, there will be shift in the MDS. 
4. The aggregate supply schedule shows the quantity of output 
that firm wish to supply at different price level. The level of 
output depends on the level of employment of labour. 

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5. A shift of labour supply curve to the right will lead to a shift of 
aggregate supply curve. 
6. The equilibrium price is obtained at point where Aggregate 
Demand intersects the Aggregate Supply Schedule as curve 
is vertical in Classical model. 
7. A monetary expansion, under Classical supply conditions, 
raises prices in the same proportion as the rise in nominal 
money. All real variables 
– specifically, output and interest 
rates 
– remain unchanged.
8. Under Classical supply conditions a fiscal expansion has no 
effect on output. But a fiscal expansion raises prices, lower 
real balances, and increases equilibrium interest rates. That 
is, under Classical supply conditions there is full crowding out. 
Private spending declines by exactly the increase in 
government demand. 
9. The Classical economist believed that the price and wages are 
fully flexible and the output always remains at full employment. 
10. Supply shocks pose a difficult problem for macroeconomic 
policy. They can be accommodated through expansionary 
aggregate demand policy, with increased prices but stable 
output. Alternatively, they can be offset, through a deflationary 
aggregate demand policy, with prices remaining stable but 
with lower output. 
11. Stagflation occurs when Inflation take place and output is 
neither falling and nor rising. 
12. The short-run Phillips curve is quite flat. Within a year, one 
point of extra unemployment reduces inflation by only about 
one-half of a point of inflation. 
13. Phillips curve showed the menu of choices available, 
government had to decide how much extra inflation they were 
prepared to tolerate in exchange of lower unemployment. 
14. In the long run any increase in nominal money is accompanied 
by same increase in money wage, prices and nominal rate of 
interest. Hence, the real variable remains constant and output 
remain at full employment.