21 The AD - AS Model_ Part 1

21 The AD AS - Agenda Business Cycle Analysis A Preview The IS LM AD AS Model A General Framework for Macroeconomic Analysis Part 1 The Problem of

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1 21-1 TheIS–LM/AD–ASModel: A General Framework for Macroeconomic Analysis, Part 1 21-2 Agenda • Business Cycle Analysis: A Preview. • The Problem of Unemployment. • The Problem of Inflation. 21-3 Business Cycle Analysis: A Preview • What explains business cycle fluctuations? ¾ 2 major components of business cycle theories: • A description of the shocks. • A model of how the economy responds to shocks. ¾ 2 major business cycle theories: • Classical theory. • Keynesian theory. 21-4 Business Cycle Analysis: A Preview • What explains business cycle fluctuations? ¾ Both theories can be studied in an aggregate demand-aggregate supply ( AD-AS ) framework. ¾ The AD-AS model has 3 main components: • An aggregate demand ( AD ) curve, • A short-run aggregate supply ( SRAS ) curve, and • A long-run aggregate supply ( LRAS ) curve.
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2 21-5 Business Cycle Analysis: A Preview AD and AS —A brief introduction: ¾ The aggregate demand ( AD ) curve: • Shows quantity of goods and services demanded ( Y ) for any price level ( P ). • A higher P means less aggregate demand (lower Y ), – The aggregate demand curve slopes downward. • An increase in aggregate demand for a given P shifts the aggregate demand curve to the right. 21-6 The Aggregate Demand Curve 21-7 Business Cycle Analysis: A Preview AD and AS —A brief introduction: ¾ The short-run aggregate supply ( SRAS ) curve: • The short-run aggregate supply curve shows how much output ( Y ) producers are willing to supply in the short- run at any given price level ( P ). • The short-run aggregate supply curve is horizontal. – We assume the prices are fixed in the short run. 21-8 The Short-run Aggregate Supply Curve
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3 21-9 Business Cycle Analysis: A Preview AD and AS —A brief introduction: ¾ The long-run aggregate supply ( LRAS ) curve: • The long-run aggregate supply curve shows how much output ( Y ) producers are willing to supply in the long- run at any given price level ( P ). • The long-run aggregate supply curve is vertical at the full-employment level of output. 21-10 The Long-run Aggregate Supply Curve 21-11 Business Cycle Analysis: A Preview AD and AS —A brief introduction: ¾ Equilibrium in the AD AS model: Short-run equilibrium : At the Y and P where the aggregate demand ( AD ) curve intersects the short-run aggregate supply ( SRAS ) curve. Long-run equilibrium
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This note was uploaded on 02/08/2011 for the course UGBA 101b taught by Professor Wilcox during the Summer '08 term at University of California, Berkeley.

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21 The AD AS - Agenda Business Cycle Analysis A Preview The IS LM AD AS Model A General Framework for Macroeconomic Analysis Part 1 The Problem of

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