07_Lecture_Slides - Economics 104 Fall 2010 1 Models of...

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Unformatted text preview: Economics 104 Fall 2010 1 Models of Aggregate Demand and Supply Outline & Readings Standard model of AD & AS (Price and Output Model) chapter 10. ADI & AS Model (Inflation and Output Model) chapter 11 and Appendix. Economics 104 Fall 2010 2 Standard model of AD & AS (Price and Output Model) Objective: to understand how output and the price level are determined in the short and long run. 1. Components of the Model The model has three components: (i) Long run aggregate supply (LRAS) Long run aggregate supply is equal to potential output. Potential output Y * is independent of the price level. Changes in the underlying determinants of potential output (labour force, capital stock, productivity) shift the LRAS. Economics 104 Fall 2010 3 (ii) Short run aggregate supply (SRAS) In the short run, firms increase production (supply) at constant prices. The price level P is independent of production Y . Broad changes in costs faced by all (most) firms shift the SRAS. For example, * A general rise in input costs, such as wage increases. * A rise in cost for an important intermediate input such as energy.- 6 P Y LRAS- 6 P Y SRAS Economics 104 Fall 2010 4 (iii) Aggregate Demand (AD) Planned aggregate expenditure ( PAE ) depends inversely upon the price level...
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This note was uploaded on 01/28/2011 for the course ECON 104 taught by Professor Voss during the Winter '10 term at University of Victoria.

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07_Lecture_Slides - Economics 104 Fall 2010 1 Models of...

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