Chapter 7_Aggregate Demand Supply

Chapter 7_Aggregate Demand Supply - AGGREGATE DEMAND AND...

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AGGREGATE DEMAND AND AGGREGATE SUPPLY 7 CHAPTER
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Objectives After studying this chapter, you will able to Explain what determines aggregate supply Explain what determines aggregate demand Explain macroeconomic equilibrium Explain the effects of changes in aggregate supply and aggregate demand on economic growth, inflation, and business cycles Explain U.S. economic growth, inflation, and business cycles by using the AS-AD model.
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Production and Prices What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How do policy actions by the government and the Federal Reserve affect output and prices?
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Aggregate Supply Aggregate Supply Fundamentals The aggregate quantity of goods and services supplied depends on three factors: The quantity of labor ( L ) The quantity of capital ( K ) The state of technology ( T ) The aggregate production function shows how quantity of real GDP supplied, Y , depends on labor, capital, and technology.
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Aggregate Supply Aggregate Supply Fundamentals The aggregate production function is written as the equation: Y = F ( L , K , T ). In words, the quantity of real GDP supplied depends on (is a function of) the quantity of labor employed, the quantity of capital, and the state of technology. The larger is L , K , or T , the greater is Y .
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Aggregate Supply Aggregate Supply Fundamentals At any given time, the quantity of capital and the state of technology are fixed but the quantity of labor can vary. The higher the real wage rate, the smaller is the quantity of labor demanded and the greater is the quantity of labor supplied. The wage rate that makes the quantity of labor demanded equal to the quantity supplied is the equilibrium wage rate and at that wage the level of employment is the natural rate of unemployment .
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Aggregate Supply Aggregate Supply Fundamentals 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 The macroeconomic long run is a time frame that is sufficiently long for all adjustments to be made so that real GDP equals potential GDP and there is full employment. The long-run aggregate supply curve ( LAS ) is the relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP.
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Aggregate Supply Figure 23.1 shows an LAS curve with potential GDP of $10 trillion. The LAS curve is vertical because potential GDP is independent of the price level. Along the LAS curve all prices and wage rates vary by the same percentage so that relative prices and the real wage rate remain constant.
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Aggregate Supply Short-Run Aggregate Supply The macroeconomic short run is a period during which real GDP has fallen below or risen above potential GDP. At the same time, the unemployment rate has risen
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Chapter 7_Aggregate Demand Supply - AGGREGATE DEMAND AND...

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