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08_Lecture_Slides - Economics 104 Fall 2010 1 Models of...

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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.
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Economics 104 Fall 2010 2 ADI & AS Model: Inflation and Output Objective: a description (model) of inflation and output. Some key ideas: Inflation is slow to adjust ( intertial ) and depends upon expectations . Monetary policy: the central bank’s reaction function . Effects of aggregate demand and aggregate supply shocks. Costs and benefits of disinflation. Some perspective: Covers many of the same ideas as previous chapter but with different emphasis. Model is similar to previous chapter but distinct in its (i) focus on inflation and (ii) the role of monetary policy.
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Economics 104 Fall 2010 3 1. Inflation and Aggregate Demand — the ADI curve Previously Fixed price model: planned aggregate expenditure equal production (output) at a given price level P . AD curve: changes in price level changes aggregate demand (real balance effect; foreign trade effect). Aggregate Demand Inflation Curve: an inverse relationship between inflation and aggregate demand (which in short run is equal to output). - 6 π Output Y ADI
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Economics 104 Fall 2010 4 (a) The ADI curve slopes downwards because of the central bank’s policy reaction function :
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