Chapter 20 Aggregate Demand and Aggregate Supply

Chapter 20 Aggregate Demand and Aggregate Supply - Chapter...

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Chapter 20Aggregate Demand and Aggregate Supply Recession- a periods of declining real incomes and risings unemployment. Depression- a severe recession. Three Key Facts about Economic Fluctuations What are Fluctuations like? Fact 1: Economic Fluctuations are Irregular and Unpredictable Economic fluctuations are not at all regular, and they are almost impossible to predict with much accuracy. Recessions do not come at regular intervals, sometimes they are close together, sometimes far apart. Fact 2: Most Macroeconomic Quantities Fluctuate Together Because fluctuations are economy wide phenomena, they show up in many sources of macroeco- nomic data. Although many macroeconomic variables fluctuate together, they fluctuate by differ - ent amounts. In particular, investment spending varies greatly over the business cycle and ac - counts for most of the declines in GDP. Fact 3: As Output Falls, Unemployment Rises When real GDP declines, the rate of unemployment rises.-->When firms choose to produce a smaller quantity of goods and services, they lay off workers, expanding the pool of unemployed. Expanding Short Run Economic Fluctuations What causes fluctuations? The Assumptions of Classical Economics In the classical view, money does not matter, changes in the quantity of money is nominal(nearly insignificant), the real variables are the things we really want to look at. The Reality of Short Run Fluctuations Most economists believe that classical theory describes the world in the long run but not in the short run. In the short run, real and nominal variables are highly intertwined, and changes in the money supply can temporarily push real GDP away from its long run trend. Even classical economist David Humes found that when money supply expanded after gold discoveries, it took some time for prices to rise, and in the meantime, the economy enjoyed higher employment and production. Therefore, when we study the short run fluctuations, we must abandon classical dicho- tomy and neutrality of money. The Model of Aggregate Demand and Aggregate Supply
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Our Model of short run economic fluctuations focuses on the relationship between the output as measured in real GDP and price level as measured in CPI or GDP deflator. Model of aggregate demand and aggregate supply - The model that most economists use to ex- plain short-run fluctuations in economic activity around its long run trend. On the horizontal axis is the overall quantity of goods and services produced in the economy. Aggregate demand curve - a curve that shows the quantity of goods and services that house- holds, firms, the government, and customers abroad want to buy at each price level. Aggregate supply curve - a curve that shows the quantity of goods and services that firms choose to product at each price level A microeconomic substitution to explain how the supply and demand curve is sloped is not ap- propriate because our model here is to explain the total quantity of goods and services produced in all markets rather than just one good or service. The Aggregate Demand Curve
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Chapter 20 Aggregate Demand and Aggregate Supply - Chapter...

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