Monday, January 12, 2015

Prepare To Have Your Mind Blown

Using this graph, how do you increase Y (GDP)?  There's one way, and only one way.

What happens if you increase aggregate demand?  Your price level (inflation) increases from P1 to P2, but there is no change to GDP because RE-AS is vertical at Y1.

What happens if you increase aggregate supply?  Your GDP increases from Y1 to Y2 (RE-AS shifts rightwards), without an increase in the price level.

The next time you hear someone knock supply side economics, you know why they're wrong.  In fact, most liberals have no idea what this graph means.  Click here for part 2.