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Principles of Economics- Mankiw (5th) 697

Principles of Economics- Mankiw (5th) 697 - CHAPTER 31 A G...

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CHAPTER 31 AGGREGATE DEMAND AND AGGREGATE SUPPLY 721 have fully adjusted to this long-run equilibrium. That is, when an economy is in its long-run equilibrium, perceptions, wages, and prices must have adjusted so that the intersection of aggregate demand with short-run aggregate supply is the same as the intersection of aggregate demand with long-run aggregate supply. THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND Suppose that for some reason a wave of pessimism suddenly overtakes the econ- omy. The cause might be a scandal in the White House, a crash in the stock market, or the outbreak of a war overseas. Because of this event, many people lose confi- dence in the future and alter their plans. Households cut back on their spending and delay major purchases, and firms put off buying new equipment. What is the impact of such a wave of pessimism on the economy? Such an event reduces the aggregate demand for goods and services. That is, for any given price level, households and firms now want to buy a smaller quantity of goods
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