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Macroeconomics Tutor London – Top Macroeconomics Teachers

Best Macroeconomics tutor in London for private economics classes.

Lessons in macroeconomics: goods market, money market, ISLM framework, Mundell-Fleming model, Solow Growth Model.

Macroeconomics Tutor London New York

Our Macroeconomics tutor in London will prepare students for an in-depth AD-AS analysis for all monetary and fiscal policy responses. Private lessons for macroeconomics tutoring available in person and online.

No Policy Response

Figure above shows what happens to real output and prices in the short-run and in the long-run when there is no policy response. The initial equilibrium is at 1 where AD1 and AS1 meet. A fall in AD to AD2 shifts the equilibrium to point 2. It lowers the price level and output drops to Y2. The economy is below the full employment level of Yp and there is unemployment.

Without a policy response, over the long-run AS will move to AS3 as cost of production and wages go down. The new equilibrium is at 3 where output increases back to Yp and the economy settles permanently at a lower price level.

Monetary Policy Response


Once AD drops to AD2 and the output falls below Yp, an absence of policy response can restore the economy to equilibrium in the long-run. However, it can take a really long time and the cost in terms of lost output and unemployment can be considerable. In order to mitigate the economic pain and expedite the recovery, a monetary policy response is to lower the interest rate to boost investment. As a result, AD is pushed back to AD1 and output restores to Yp. The level of inflation goes back up as the economy moves back to the original equilibrium level of Yp.

Work with our macroeconomics tutor in London for a complete understanding of fiscal and monetary policy response to exogenous shocks.

Permanent adverse supply shock

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Adverse Supply Shock: no policy response

An adverse supply shock that is left alone leads to higher inflation and also a recession with lost output and higher unemployment. This situation is often called stagflation because it causes inflation and economic stagnation. Modern economies do not typically operate with no policy response. In fact, central banks and governments act decisively to stabilize the economy in most situations.

Adverse Supply Shock with expansionary policy action

permanent supply shock macroeconomics

Permanent Supply Shock: policy response

When a supply shock is temporary, policymakers face a short-run tradeoff between stabilizing inflation and economic activity. A negative supply shock creates a very special economic situation. Policy makers are stuck between two hard options. A central bank can either control inflation by reducing aggregate demand, pushing the economy towards point 3. This move lowers inflationary pressure but exacerbates the output gap. Recession gets worse , output falls further, and unemployment increases. This can be fairly difficult for a government to survive. The other option is to push the economy back to full employment, except it leads to much higher inflation. Albeit destabilizing, it does bring the economy back to full employment.

Policymakers can respond to the temporary supply shock in three possible ways:
– No policy response
– Policy stabilizes inflation in the short run
– Policy stabilizes economic activity in the short run

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