lec22slides - 17 Expansionary policy creates inflation as...

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1 PRICES Determination of General Price Level: Aggregate Demand and Supply 3 Determination of General Price Level: Aggregate Demand and Supply 1. Prices determine output level. 2. Output level determines prices.
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4 Higher prices Lower output 5 AE r Y M M S r 1 M d 1 for P 1 Y 1
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6 P up M d up r up AE r Y M M S r 2 r 1 M d 2 for P 2 M d 1 for P 1 Y 1 7 P up M d up r up Y down AE r Y M M S r 2 r 1 M d 2 for P 2 M d 1 for P 1 Y 2 Y 1
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9 Aggregate Demand Curve: P Y AD P 1 Y 1 Y 2 P 2 10 Opposite causation: Higher Y puts upward pressure on prices as approach full employment Y.
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11 Aggregate Supply Curve: P Y Y F 12 Equilibrium: P Y AD AS P* Y* Y F
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14 P Y AD AS P 1 P* P 2 Y 1 Y* Y 2 Y F Movement toward Equilibrium: 16 Equilibrium Y and P rise. P Y AS AD 2 AD 1 P 2 P 1 Y 1 Y 2 Y F Effect of Expansionary Policy
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Unformatted text preview: 17 Expansionary policy creates inflation as well as increasing output. 18 When near full employment Y, expansionary policy produces high inflation and little growth in output. P Y AS AD 2 AD 1 P 2 P 1 Y 1 Y 2 Y F 19 When far from full employment output, expansionary policy creates little inflation and high growth in output. P Y AS AD 2 AD 1 P 2 P 1 Y 1 Y 2 Y F 21 P Y AD AS 1 P 2 P 1 Y 1 Y 2 AS shifts up: prices rise and output drops. AS 2...
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This note was uploaded on 11/28/2010 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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lec22slides - 17 Expansionary policy creates inflation as...

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