MacroEcon Chapter 7

MacroEcon Chapter 7 - Chapter Seven Study Guide: Short Run...

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Chapter Seven Study Guide: Short Run Fluctuations Objective of the chapter: Explain unsolved questions from the long run growth models by exploring the role played by short run economic fluctuations ?The questions to be addressed? 1.Why does it take several years for the economy to return to potential GDP after a shock? 2. What forces push output away from its potential? Background for the model: -Prices are unresponsive to current developments. They only move gradually, and over an extended period of time. -some key spending relationships are consistent even in the short run. .. so. .. the model considers spending relationships *If demand is strong, real GDP exceeds potential *If demand is weak, as in a recession, real GDP drops below potential -The aggregate demand curve represents these basic principles graphically 7.1 Forces that Push the Economy Off it’s Growth Path -When any price level along the vertical axis is extended to land on the aggregate demand curve, the resulting point demonstrates the output (real GDP) being granted by the spending occurring at the price level Y=real GDP P=price level increase P => decrease Y decrease P => increase Y Insert Figure 7.1 The Aggregate Demand Curve - Any change in spending habits by the government, or by consumers, that results in a shift of the aggregate demand curve itself is moving the economy away from it’s potential (ex: fiscal and monetary policy, consumption, investment, foreign purchases of
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domestic goods, etc. ..) Insert Figure 7.2 Output Declines when AD shifts inward
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MacroEcon Chapter 7 - Chapter Seven Study Guide: Short Run...

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