AS - PRINCIPLES OF MACROECONOMICS AGGREGATE SUPPLY Foster...

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PRINCIPLES OF MACROECONOMICS AGGREGATE SUPPLY Foster
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2 The Model of Aggregate Demand & Aggregate Supply P Y AD SRAS P 1 Y The price level Real GDP, the quantity of output The model determines the equil. price level and equil. output (real GDP).
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3 The Aggregate-Supply (AS) Curves The AS curve shows the total quantity of goods & services firms produce and sell at any given price level. P Y SRAS LRAS AS is: upward-sloping in short run vertical in long run
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4 The Long-Run Aggregate-Supply Curve (LRAS) The natural rate of output ( Y N ) is the amount of output the economy produces when unemployment is at its natural rate. Y N is also called Potential Output or Full-Employment Output . P Y LRAS Y N
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Actual and Potential Output from 1989 to 2007 5
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6 Why LRAS Is Vertical Y N determined by the economy’s stocks of labor, capital, and natural resources, and on the level of technology. P Y LRAS P 1 An increase in P does not affect any of these, so it does not affect Y N . (Classical dichotomy) P 2 Y N
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7 Why the LRAS Curve Might Shift Any event that changes any of the determinants of Y N will shift LRAS . Changes in L or natural rate of unemployment • Immigration • Baby-boomers retire • Govt policies reduce natural unemployment rate Changes in K or H • Investment in factories, equipment • More people get college degrees •Factories destroyed by a hurricane Changes in natural resources • Discovery of new mineral deposits • Reduction in supply of imported oil
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AS - PRINCIPLES OF MACROECONOMICS AGGREGATE SUPPLY Foster...

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