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Aggregate Supply and Demand

Aggregate Supply and Demand - CHAPTER 14 AGGREGATE DEMAND...

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Unformatted text preview: CHAPTER 14 AGGREGATE DEMAND AND AGGREGATE SUPPLY DETERMINATION OF REAL GDP AGGREGATE DEMAND AND SUPPLY 7?“: FF) a 0 investment Level .gwmmwt 0 net exports AD 17.: I 4 DP Why Inverse? 0:0 WEALTH EFFECT 0:0 INTEREST RATE EFFECT '3 INTERNATIONAL TRADE EFFECT SHIFTS IN AGGREGATE DEMAND Prue (— P) 0 CHANGES IN THE SUPPLY OF MONEY 0 CHANGES IN TAXES 0 CHANGES IN GOVERNMENT SPENDING LON G-RUN AGGREGATE SUPPLY ‘ 7r“: A5 M Y* = full employment output (real gdp) Y* unrelated to price but is influenced by capital, labor, technology. (like production possibility curve) LONG-RUN EQUILIBRIUM o In the long-run, changes in AD will only change price, not output ‘ o In the long-run, equilibrium will always return to full employment. 0 “CLASSICAL SCHOOL OF ECONOMICS SHORT-RUN EQUILIBRIUM o In the short-run prices are slow to adjust and increased in AD can result in increases in output 0 Note that equilibrium output (e.g. Yo) need not be the same as full employment 0 “JOHN MAYNARD KEYNES ' SUPPLY SHOCKS External events that shift the aggregate supply curve (e.g. oil embargos) 0 At each price level, firms are Willing to produce less output because of higher price inputs (oil) 0 Results in lower output and higher prices ...
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