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Unformatted text preview: -suppose price decreases to p3-when price decreases, you buy more stuff, AE increases to AE3-connect the dots on bottom graph and get AD-consider very short run all prices are sticky-suppose G increases-this increase AE to AE2-then AD increases to AD2-but in SR, prices can adjust (wages sticky)-SR equilibrium is where AD=SRAS-so in SR, prices go up a little.-but when price increases, AE decreases to AE3-in LR, wage can adjust-when G increase, AE increase, to AE2-and AD to AD2-in SR, Price increase, AE decreases to AE3-in LR, wages increase, SRAS decreases to SRAS2 then Price increases, AE decreases to AE,-in LR, Govt has no effect on real GDP-only effect is higher prices...
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- Fall '06
- Economics, price increases, AE