Principles of Macroeconomics – Aggregate Supply and Aggregate Demand (Lecture 3.2)

Principles of Macroeconomics – Aggregate Supply and Aggregate Demand (Lecture 3.2)

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Principles of Macroeconomics – Aggregate Supply and Aggregate Demand (Lecture 3.2) The Business Cycle The business cycles occur because aggregate demand and short-run aggregate supply fluctuate but the money wage rate does not adjust quickly enough to keep real GDP at potential GDP. Real GDP sometimes fluctuates as a result of changes in aggregate demand. o A is full employment Ye = Yp o B is inflationary gap Ye > Yp o C is recessionary gap Ye < Yp Change in AD are caused by its components which are: o Households C (Covers about 60% of the movement in AD) o Firms I Firms play a part in the AD through the confidence of firms. o Government G o Overseas X-M Short run An increase in export leads to an increase in AD in the short-run.
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The price level will also increase and Real GDP which will lead to an increase in wages, causing a fall in the SAS. This finally leads to an even higher price level and a decrease of Real GDP, increasing inflation overall in the short-run. Macroeconomic way of thinking
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Principles of Macroeconomics &acirc;€“ Aggregate Supply and Aggregate Demand (Lecture 3.2)

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