9.5 Conclusion


This chapter has introduced a framework to study economic fluctuations: the model of aggregate supply and aggregate demand. The model is built on the assumption that prices are sticky in the short run and flexible in the long run. It shows how shocks to the economy cause output to deviate temporarily from the level implied by the classical model.

The model also highlights the role of monetary policy. Poor monetary policy can be a source of shocks to the economy. A well-run monetary policy can respond to shocks and stabilize the economy.

In the chapters that follow, we refine our understanding of this model and our analysis of stabilization policy. Chapters 10, 11, and 12 go beyond the quantity equation to refine our theory of aggregate demand. This refinement shows that aggregate demand depends on fiscal policy as well as monetary policy. Chapter 13 examines aggregate supply in more detail. Chapter 14 brings these elements together in a dynamic model of aggregate demand and supply. Chapter 15 examines the debate over the virtues and limits of stabilization policy.