Chapter Summary: Money Mechanics

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Chapter Summary: Money Mechanics

Chapter 11: Macroeconomic Coordination: Output-Price Adjustments

This chapter describes three situations of output-price adjustments. First, organizations with equal demand and supply. Second, organizations with surplus demand. Third, organizations will have insufficient demand.

In case GDP=APE=ASF, IS line is crossed by GDP, ASF and APE at a single point (Ashby, 2013). When APE=GDP, Group B and C producers will be not aware of this equality. When APE is equal to GDP, the total demand shortage encountered by organizations in Group C is same to the total surplus demand faced by the organizations in Group B. Consequently, it can be rationally anticipate from presume behavior regarding profit-maximizing that the price and output increase from Group B will adequately equalize the decrease in price and output coming from Group C to leave insignificant net effect upon either the average prices level and total GDP.

Figure 1

In case GDP
Figure 2

When APE is greater than GDP; firms in Group B, the overall combined surplus demand will go beyond the sum of demand shortage by Group C organization by exact amount by which APE surplus GDP. Consequently, there will be an increase in GDP and prices.

In case, APE
Figure 3

If inequality develops between GDP and APE, producers of the nation - both are responding to its situation of sales-relative-to-production while completely uninformed about inadequate demand relative to supply.



Chapter 12: Macroeconomic Shocks: Excess Demand Cases

In the book money mechanics, chapter 12 revolves around macroeconomic shocks. Six shocks have been identified with an increase or decrease of ASF, APE and GDP, which cause the MCP (macroeconomic coordination process). Firstly, the author discusses the decrease in GDP results in the increase ASF and APE as the three macroeconomic shocks will meet the state APE>GDP=ASF after adjustment of funding. However, the economy established the equilibrium in the long-term that is GDP=APE=ASF where the economy gets hits by the shock. In this chapter, three cases are discussed which are as follows (Ashby, 2013):

Case 1 depicts the case of increase in APE. Due to the increase in aggregate demand, funding appears to be a problem. ASF is less than APE, along with no fund to cater new demand. To increase funding, APE will be decreased while increase in ASR and interest rate until APE=ASF. There will be exceed demand of funding after the adjustment when APE>GDP=ASF. Thus, there will be an increase in price, output and employment which increase interest rate so the economy reached the state where GDP=APE=ASF, this will lead to increase in GDP. Below figure better demonstrate the case one.

Figure 1

The above figure shows ...