Chapter 20. - Chapter 20. Aggregate Supply and Demand. Not...

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Aggregate Supply and Demand. Not a predictive model, but it helps explain how things work. The model will explain short and long run variations in economic variables. Key Facts: A. Economic fluctuations are irregular and unpredictable. B. Most economic variables we talk about fluctuate together. o Consumption flows really closely with GDP. This occurs because if you make more, you consume more. Consumption is not that sensitive. o Investment flows really closely with investment. When GDP/output goes down, so does investment. It’s very sensitive. It’s also very sensitive when the government runs a deficit. o GDP and government spending are counter-cyclical. They don’t move together. o Cyclical: They move together. GDP, C, I. o Counter-cyclical: They don’t move together, because of automatic stabilizers. GDP, G. Automatic stabiliziers: TANF, Medicaid, etc. C. As output falls, unemployment rises. o Usually, you think of output as a function of unemployment. This is true, but the level of unemployment itself is affected by how much output is produced. The causation is more so that output affects unemployment During a recession, the demand for goods and services decrease. The firms are selling as much, so there isn’t as much need for the workers anymore. Less demand less output less workers. o GDP and unemployment move counter-cyclically. SR (In the short run): o Money neutrality (money has no effect on real variables—output, unemployment.) is not an appropriate assumption, because in the SR, money can affect real variables. Aggregate Demand: A demand curve for real GDP, output, or all goods and services. o What we’re going to be graphing here is the average price level of all goods and services. What causes the AD curve to slope downwards? All these things affect the SLOPE of the curve… They don’t shift it. The higher the price level, the less people want to consume. o 1. Consumption. As the price level goes up, ceteris paribus, output goes down. This is called the wealth effect. As the price level goes up, real wealth goes down, and consumption must decrease. Real weath = purchasing power of salary over time. o 2. Interest rate effect. (Intertemporal substitution effect).
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This note was uploaded on 04/24/2009 for the course ECON 2105h taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

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Chapter 20. - Chapter 20. Aggregate Supply and Demand. Not...

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