chapter09-1spp

chapter09-1spp - 1 Chapter 9 Introduction to Economic...

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Unformatted text preview: 1 Chapter 9 Introduction to Economic Fluctuations 2 1 Learning Objectives • difference between short run & long run • introduction to aggregate demand • aggregate supply in the short run & long run • see how model of aggregate supply and demand can be used to analyze short- run and long-run effects of “shocks” 3 2 Real GDP Growth in the United States-4-2 2 4 6 8 10 1960 1965 1970 1975 1980 1985 1990 1995 2000 Percent change from 4 quarters earlier Average growth rate = 3.5% 4 3 Time horizons Why do we need a new approach when the time horizon changes? • Long run: Prices are flexible, respond to changes in supply or demand (Classical Dichotomy holds; i.e. a change in money supply only effects prices) • Short run: many prices are “sticky” at some predetermined level (Hence a change in money supply would be partially adjusted by a change in real variables) 5 4 The Model of Aggregate Demand and Supply • the paradigm that most mainstream economists & policymakers use to think about economic fluctuations and policies to stabilize the economy • shows how the price level and aggregate output are determined • shows how the economy’s behavior is different in the short run and long run 6 5 Aggregate Demand • The aggregate demand curve shows the relationship between the price level and the quantity of output demanded. • For this chapter’s intro to the AD/AS model, we use a simple theory of aggregate demand based on the Quantity Theory of Money. • Chapters 10-12 develop the theory of aggregate demand in more detail !!!! 7 6 1. The Quantity Equation as Aggregate Demand • From Chapter 4, the quantity equation M V = P Y the postulated money demand function and money market equilibrium implies V id constant where V = 1/ k : ( M/P ) d = k Y=(M/P) ....
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This note was uploaded on 09/21/2011 for the course PHY 201 at Penn State.

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chapter09-1spp - 1 Chapter 9 Introduction to Economic...

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