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Unformatted text preview: Aggregate Demand & Aggregate Supply Sandeep Bhaskar Temple University Sandeep Bhaskar (Temple University) Aggregate Demand & Aggregate Supply 1 / 32 Outline 1 Introduction 2 Aggregate Supply 3 Aggregate Demand 4 Macroeconomic Equilibrium 5 Policy Implications Sandeep Bhaskar (Temple University) Aggregate Demand & Aggregate Supply 2 / 32 Introduction Introduction Aggregate Demand & Aggregate Supply model is the simplest model of business cycles. Explains how changes in the spending patterns, or changes in production processes affects the output in the economy. Explains the role of the government as an agent capable of driving the economic engine. Explains the impact of policy changes. Sandeep Bhaskar (Temple University) Aggregate Demand & Aggregate Supply 3 / 32 Introduction Time Frames: Short Run and Long Run We discuss the state of the economy in two time frames: the short run and the long run. Underlying difference is the idea that over some period of time the money prices are sticky, that is, they do not change. But this stickiness eventually disappears. We are therefore left to examine two different ways in which the economy behaves: one over the time frame when prices are sticky, and one when prices have changed to reflect the new situation. Sandeep Bhaskar (Temple University) Aggregate Demand & Aggregate Supply 4 / 32 Introduction Short Run and Long Run Prices are sticky in the short run, and are not sticky in the long run. Short Run: The time frame in which at least one factor of production is fixed. Long Run : Period in which all factors of production can be varied. In the former the factor that stays fixed has an impact on prices, while in the latter the only thing that matters is productivity of the factors: the output in the long run just depends on your productive capacity and not on nominal variables. Sandeep Bhaskar (Temple University) Aggregate Demand & Aggregate Supply 5 / 32 Aggregate Supply Aggregate Supply Plots the total supply of goods and services of an economy. Since there are two different time frames we have two different aggregate supply curves: one for each time frame Short-Run Aggregate Supply Long-Run Aggregate Supply Sandeep Bhaskar (Temple University) Aggregate Demand & Aggregate Supply 6 / 32 Aggregate Supply Short-Run Aggregate Supply Plots production against price in the period in which prices are sticky In this period the suppliers can usually change labor, but cannot change capital or technology. Production depends on all three, since Y = f ( L , K , T ) The only way firms can make people work more is to pay them higher wages, and thus the total production depends on the price level. Sandeep Bhaskar (Temple University) Aggregate Demand & Aggregate Supply 7 / 32 Aggregate Supply Short-Run Aggregate Supply When firms hire a lot of people they push up wages, and push up production....
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ad-as - Aggregate Demand & Aggregate Supply...

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