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Unformatted text preview: 1 Chapter 9 Introduction to Economic Fluctuations 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 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% 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) 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 economys behavior is different in the short run and long run 5 Aggregate Demand The aggregate demand curve shows the relationship between the price level and the quantity of output demanded. For this chapters 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 !!!! 2 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 Pennsylvania State University, University Park.