How Long is the Long Run?
Once again we see that the change in aggregate demand has had only a short run effect. The recession caused by the decline in autonomous consumption has run its course, and production has returned to its NAIRGDP level. Many recessions do run their course in some such way, it seems.
According to some economic historians, a reduction in autonomous consumption began the Great Depression of the 1930's. Perhaps that recession would have run its course more quickly had the problem not been compounded by several others: the money supply and investment collapsed, tariffs were raised both by the US and other countries, and the weather got really bad in the Midwest. We have also noticed, in passing, that saving has been very low in the United States since the 1970's. From some points of view, it would be best if Americans were to consume less and save more -- and a few observers have seen some signs that this may happen. What if we were to see a reduction in autonomous consumption in the near future? Using the Simple Keynesian Model the answer would be a one-word answer: recession. We can now be a little more specific. Our analysis using the AS/AD model says that a recession would be probable in the short run. However, the recession would lead to lower interest rates, stimulate investment, and thus the recession would run its course, and be followed by a return to the NAIRGDP.
How Long is the Long Run?
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