Ch11 - CHAPTER 1 1 Aggregate Supply and Aggregate Demand...

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Aggregate Supply and Aggregate Demand CHAPTER 11
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After studying this chapter you will be able to Distinguish between the macroeconomic long run and short run Explain what determines aggregate supply Explain what determines aggregate demand Explain how real GDP and the price level are determined and how changes in aggregate supply and aggregate demand bring economic growth, inflation, and the business cycle Describe the main schools of thought in macroeconomics
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Production and Prices Production grows and prices rise, but the pace is uneven. What forces bring persistent and rapid expansion of real GDP? What forces bring inflation? Why do we have business cycles? What is the range of view of macroeconomists in different schools of thought?
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Macroeconomic Long Run and Short Run The Macroeconomic Long Run The macroeconomic long run is a time frame that is sufficiently long for the real wage rate to have adjusted to achieve full employment: Real GDP equals potential GDP. Unemployment is at the natural unemployment rate. The price level is proportional to the quantity of money. The inflation rate equals the money growth rate minus the real GDP growth rate.
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Macroeconomic Long Run and Short Run The Macroeconomic Short Run The macroeconomic short run a period during which some money prices are sticky so that Real GDP might be below, above, or at potential GDP. The unemployment rate might be above, below, or at the natural unemployment rate.
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Aggregate Supply The quantity of real GDP supplied is the total quantity that firms plan to produce during a given period. It depends on The quantity of the labor employed The quantity of physical and human capital State of technology We distinguish two time frames associated with different states of the labor market: Long-run aggregate supply Short-run aggregate supply
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Aggregate Supply Long-Run Aggregate Supply Long-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP. Potential GDP is independent of the price level. So the long-run aggregate supply curve ( LAS ) is vertical at potential GDP.
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Aggregate Supply Figure 11.1 shows the LAS curve with potential GDP of $12 trillion. Along the LAS curve, all prices and wage rates vary by the same percentage so relative prices and the real wage rate remain constant.
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Short-Run Aggregate Supply Short-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant. A rise in the price level with no change in the money wage rate and other factor prices increases the quantity of real GDP supplied. The short-run aggregate supply curve (
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Ch11 - CHAPTER 1 1 Aggregate Supply and Aggregate Demand...

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