KW_Macro_Ch_10_Sec_01_Aggregate_Supply - chapter 10...

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>> Aggregate Supply and Aggregate Demand Section 1: Aggregate Supply chapter 10 Between 1929 and 1933, the demand curve for almost every good produced in the United States shifted to the left—the quantity demanded at any given price fell. We’ll turn to the reasons for that decline in the next section, but let’s focus first on the effects on producers. One consequence of the economy-wide decline in demand was a fall in the prices of most goods and services. By 1933 the GDP deflator, one of the price indexes we defined in Chapter 7, was 26% below its 1929 level, and other indexes were down by similar amounts. A second consequence was a decline in the output of most goods and services: by 1933 real GDP was 27% below its 1929 level. A third consequence, closely tied to the fall in real GDP, was a surge in the unemployment rate from 3% to 25%. The association between the plunge in real GDP and the plunge in prices wasn’t an accident. Between 1929 and 1933, the U.S. economy was moving down its aggregate supply curve, which shows the relationship between the economy’s The aggregate sup- ply curve shows the relationship between the aggregate price level and the quanti- ty of aggregate out- put supplied.
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2 CHAPTER 10 SECTION 1: AGGREGATE SUPPLY aggregate price level (the overall price level of final goods and services in the econ- omy) and the total quantity of final goods and services, or aggregate output, pro- ducers are willing to supply. (As we learned in Chapter 7, we use real GDP to measure aggregate output. So we’ll often use the two terms interchangeably.) More specifically, between 1929 and 1933 the U.S. economy moved down its short-run aggregate supply curve. The Short-Run Aggregate Supply Curve The period from 1929 to 1933 demonstrated that there is a positive relationship in the short run between the aggregate price level and the quantity of aggregate output supplied. That is, a rise in the aggregate price level leads to a rise in the quantity of aggregate output supplied, other things equal; a fall in the aggregate price level leads to a fall in the quantity of aggregate output supplied, other things equal. To understand why this positive relationship exists, let’s think about the most basic question facing a producer: is producing a unit of output profitable or not? The answer depends on whether the price the producer receives for a unit of output, such as a bushel of corn, is greater or less than the cost of producing that unit of output. That is, (10-1) Profit per unit output = Price per unit output Production cost per unit output At any given point in time, many of the costs producers face are fixed and can’t be changed for an extended period of time. Typically, the largest source of inflexible pro- duction cost is the wages paid to workers. Wages here refers to all forms of worker compensation, such as employer-paid health care and retirement benefits in addition to earnings. Wages are typically an inflexible production cost because the dollar
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_10_Sec_01_Aggregate_Supply - chapter 10...

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