Principles of Economics- Mankiw (5th) 692

Principles of Economics- Mankiw (5th) 692 - 716 PA R T T W...

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716 PART TWELVE SHORT-RUN ECONOMIC FLUCTUATIONS it is to provide a framework for short-run analysis, as we will see in a moment. As we develop the short-run model, we keep the analysis simple by not showing the continuing growth and inflation depicted in Figure 31-5. But always remember that long-run trends provide the background for short-run fluctuations. Short-run fluctuations in output and the price level should be viewed as deviations from the continu- ing long-run trends. WHY THE AGGREGATE-SUPPLY CURVE SLOPES UPWARD IN THE SHORT RUN We now come to the key difference between the economy in the short run and in the long run: the behavior of aggregate supply. As we have already discussed, the long-run aggregate-supply curve is vertical. By contrast, in the short run, the aggregate-supply curve is upward sloping, as shown in Figure 31-6. That is, over a period of a year or two, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied, and a decrease in the
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