Econ103 – Macroeconomic Principles - Fall 2010 – Professor: Werner Baer Reading5-p.1 Reading 5 - Aggregate Demand and Aggregate SupplyRECESSION≡decline in real GDP => low inflation, high unemployment BOOM or PROSPERITY or INFLATIONARY GROWTH≡high increase in real GDP => high inflation, low unemployment VERTICAL AGGREGATE SUPPLY: when all resources of the economy are fully employed, production cannot increase even if prices increase (firms want to increase production to take advantage of higher prices, but they can’t find resources to expand production). Therefore, the supply curve is vertical. P Q QFull Agg. S SHIFTS IN AGGREGATE SUPPLY AND AGGREGATE DEMANDThe consequences to price and quantity are the same as in the supply and demand analysis covered in Chapter 3. However, recall that the shape of the Aggregate Supply curve may be different now: it has a horizontal segment, an upward slopping segment, and a vertical segment. P Q QFull Agg. S D D’ In this graph (left), the economy is on the horizontal
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