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BU204_Krugman_Chapter 10 - chapter 10 What you will learn...

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236 SHOCKS TO THE SYSTEM chapter 10 >> Aggregate Supply and Aggregate Demand N N OVEMBER 4, 1979, MILITANT Iranian students seized the U.S. embassy in Tehran, taking 66 Americans hostage. For the next 444 days the news was dominated by the plight of the hostages, the threat of U.S. military action, and the resulting political instability. The home front was further shaken by a quadru- pling of the price of oil, another repercus- sion of the hostage crisis in the Persian Gulf. Price controls on gasoline, which lim- ited its price at the pump and had been im- posed in response to an earlier jump in the price of oil, led to gasoline shortages and long lines. Next came a severe recession, the worst since the Great Depression. The in- dustrial Midwest, experiencing a cata- strophic loss in the number of jobs, became known as the Rust Belt. In Michigan, O Woodfin Camp Sclarandis, P.G./Stockphoto.com What you will learn in this chapter: How the aggregate supply curve illustrates the relationship be- tween the aggregate price level and the quantity of aggregate output supplied in the economy Why the aggregate supply curve is different in the short run com- pared to the long run How the aggregate demand curve illustrates the relationship between the aggregate price level and the quantity of aggregate output demanded in the economy The importance of the multiplier, which determines the total change in aggregate output arising from a shift of the aggregate demand curve How the AS–AD model is used to analyze economic fluctuations How monetary policy and fiscal policy can stabilize the economy ground zero of the hard-hit auto industry, the unemployment rate rose to over 16%. But if the economic slump that followed the Persian Gulf crisis looked in many ways like a small-scale repeat of the Great De- pression, it was very different in one impor- tant respect. During the Great Depression, from 1929 to 1933, the U.S. economy expe- rienced severe deflation —a falling aggregate price level. During the slump from 1979 to 1982, the economy experienced severe infla- tion —a rising aggregate price level—reaching a peak rate of more than 13%. Many people were as upset by the high inflation as by the job losses because they saw the purchasing power of their incomes shrinking. And the emergence of stagflation, the combination of inflation and rising unemployment, also shook the confidence of economists and In the late 1970s and early 1980s, energy price increases arising from events in the Middle East led to recession and inflation here at home.
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237 Aggregate Supply Between 1929 and 1933, the demand curve for almost every good produced in the United States shifted to the left—the quantity demanded at any given price fell. We’ll turn to the reasons for that decline in the next section, but let’s focus first on the ef- fects on producers.
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