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Transcript of 1 CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY SHORT-RUN AND LONG-RUN AGGREGATE SUPPLY Period in...
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 1
SHORT-RUN AND LONG-RUNAGGREGATE SUPPLY
Period in which nominal wages (and other input prices) remainfixed as the price level increases or decreases
Short Run -
Period in which nominal wages are fully responsive to previous changes in the price level
Long Run -
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 2
o
AS1
P1
P2
Q1 Q2
a1
a2
A higher price level increases profits and output moving the economy from a1 to a2
Pri
ce L
evel
Real domestic output
SHORT-RUN AGGREGATE SUPPLY
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 3
o
AS1
P1
P2
Q1 Q2
a1
a2
A lower price level decreases profits and output moving the economy from a1 to a3
Pri
ce L
evel
Real domestic output
SHORT-RUN AGGREGATE SUPPLY
P3
Q3
a3
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 4
o
AS1
P1
P2
Q1 Q2
a2
a1
AS2
b1
ASLR
Pri
ce L
evel
Real domestic output
LONG RUN AGGREGATE SUPPLYA higher price level results in higher nominal wages and thus shifts the short-run aggregate supply to the left
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 5
o
P3
Q3
AS1
P1
P2
Q1 Q2
a2
a3
a1
AS2
b1
AS3
c1
ASLR
Pri
ce L
evel
Real domestic output
LONG RUN AGGREGATE SUPPLYA lower price level results reduces nominal wages and shifts the short-run aggregate supply to the right
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 6
Why the LRAS Curve Might Shift
Any event that changes any of the determinants of YN
will shift LRAS.
Example: Immigration increases L, causing YN to rise.
P
Y
LRAS1
YN
LRAS2
YN’
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 7
LRAS1980
Using AD & AS to Depict LR Growth and Inflation
Over the long run, tech. progress shifts LRAS to the right
P
Y
AD1990
LRAS1990
AD1980
Y1990
and growth in the money supply shifts AD to the right.
Y1980
AD2000
LRAS2000
Y2000
P1980Result: ongoing inflation and growth in output.
P1990
P2000
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 8
Economic Fluctuations Caused by events that shift the AD and/or
AS curves.
Four steps to analyzing economic fluctuations:
1. Determine whether the event shifts AD or AS.
2. Determine whether curve shifts left or right.
3. Use AD-AS diagram to see how the shift changes Y and P in the short run.
4. Use AD-AS diagram to see how economy moves from new SR eq’m to new LR eq’m.
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 9
Two Big AD Shifts: 1. The Great Depression
From 1929-1933,
• money supply fell 28% due to problems in banking system
• stock prices fell 90%, reducing C and I
• Y fell 27%
• P fell 22%
• u-rate rose from 3% to 25%
550
600
650
700
750
800
850
900
19
29
19
30
19
31
19
32
19
33
19
34
U.S. Real GDP, billions of 2000 dollars
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 10
Two Big AD Shifts: 2. The World War II Boom
From 1939-1944,
• govt outlays rose from $9.1 billion to $91.3 billion
• Y rose 90%
• P rose 20%
• unemp fell from 17% to 1% 800
1,000
1,200
1,400
1,600
1,800
2,000
19
39
19
40
19
41
19
42
19
43
19
44
U.S. Real GDP, billions of 2000 dollars
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 11
LRAS
YN
The Effects of a Shift in AD
Event: stock market crash
1. affects C, AD curve
2. C falls, so AD shifts left
3. SR eq’m at B. P and Y lower,unemp higher
4. Over time, PE falls,
SRAS shifts right,until LR eq’m at C.Y and unemp back at initial levels.
P
Y
AD1
SRAS1
AD2
SRAS2P1 A
P2
Y2
B
P3 C
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AA CC TT II VV E LE L EE AA RR NN II NN G G 22: : ExerciseExercise
Draw the AD-SRAS-LRAS diagram for the U.S. economy, starting in a long-run equilibrium.
A boom occurs in Canada. Use your diagram to determine the SR and LR effects on U.S. GDP, the price level, and unemployment.
12
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AA CC TT II VV E LE L EE AA RR NN II NN G G 22: : AnswersAnswers
13
LRAS
YN
P
Y
AD2
SRAS2
AD1
SRAS1
P1
P3 C
P2
Y2
B
A
Event: boom in Canada
1. affects NX, AD curve
2. shifts AD right
3. SR eq’m at point B. P and Y higher,unemp lower
4. Over time, PE rises,
SRAS shifts left,until LR eq’m at C.Y and unemp back at initial levels.
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 14
LRAS
YN
The Effects of a Shift in SRASEvent: oil prices rise
1. increases costs, shifts SRAS(assume LRAS constant)
2. SRAS shifts left
3. SR eq’m at point B. P higher, Y lower,unemp higher
From A to B, stagflation, a period of falling output and rising prices.
P
YAD1
SRAS1
SRAS2
P1A
P2
Y2
B
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CHAPTER 33 AGGREGATE DEMAND AND AGGREGATE SUPPLY 15
LRAS
YN
Accommodating an Adverse Shift in SRAS
If policymakers do nothing,
4. Low employment causes wages to fall, SRAS shifts right,until LR eq’m at A.
P
YAD1
SRAS1
SRAS2
P1A
P2
Y2
B
AD2
P3 C
Or, policymakers could use fiscal or monetary policy to increase AD and accommodate the AS shift: Y back to YN, but
P permanently higher.