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The AD-AS Model with the Shadow Economy

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  • Gaetano Lisi

Abstract

This theoretical paper includes the shadow economy in the popular AD-AS model and derives the main economic results for both the short-run and the long-run. This accounts for the presence of the shadow economy in countries around the world, as well its persistence over time. Precisely, if the shadow economy is capable of absorbing unemployment, then in the short-run there will be a supply-side positive shock on output (the “shadow shock”). The “shadow shock” is, however, temporary; in the long-run the effect of the shadow economy on potential output is negative.

Suggested Citation

  • Gaetano Lisi, 2018. "The AD-AS Model with the Shadow Economy," Journal for Economic Educators, Middle Tennessee State University, Business and Economic Research Center, vol. 18(1), pages 8-16, Spring.
    • Handle: RePEc:mts:jrnlee:v:18:y:2018:i:1:p:8-16
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    References listed on IDEAS

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    More about this item

    Keywords

    economic education; teaching of economics; general aggregative models; shadow economy;
    All these keywords.

    JEL classification:

    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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