Chapter_11[1][1] - Chapter 11 Part 2 Webb Voss Lee Wong...

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Chapter 11: Part 2 Webb, Voss, Lee, Wong, Fried AD-AS Model – Combination of AD and AS curves, used to understand economic fluctuations Short Run Macro Equilibrium Fig 19.1 Point at which SRAS and AD intersect = SR Macro Equilibrium If Price is below/above PE- shortage/surplus Invisible hand makes equilibrium In reality there is a long-term upward trend in both aggregate output and aggregate price level o Ex: If a price normally rises 4% year, and if in a year AP rises by 3%, 1% decline compared to long-run trend Very rare for AP to actually decline in major nations (Japan’s deflation 1995- 2005) Shifts of AD: Short Run Effects Demand Pull Inflation- when AD curve shifts upward (to the right) o Economy is operating at full-employment and businesses/government decide to increase spending o Firms might increase investment spending because they anticipate higher returns from new capital New technology National defense o Price level is being pulled up with increase in aggregate demand
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