ch11asadinteraction

ch11asadinteraction - Aggregate Supply & Aggregate...

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Aggregate Supply & Aggregate Demand Chapter 11
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The AS–AD Model The  AS-AD model  uses the aggregate  supply curve and the  aggregate demand  curve together to analyze economic  fluctuations.
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Long-Run Macroeconomic equilibrium LR equilibrium of $6 trillion in real GDP and price level of 100. Supply Creates Its Own Demand! Supply Creates Its Own Demand!
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Classical View of Recessions 1. Economy starts at AD 1 : E 1 at Full employment GDP and Price level = 140. 2. During recession, AD decreases to AD 2 : E’ at lower output ($4 trillion). 3. Surplus inventory of $2 trillion so firms decrease prices until sell off surplus at E 2 . Conclusion: No government intervention necessary. Flexible prices will pull economy out of recession. Economy is self-adjusting!
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the Classical System Until the Great Depression, classical economics was the dominant school of economic thought. “Laissez-Faire”: government should intervene in economic affairs as little as possible. The Great Depression undermined faith in Say’s Law. John Maynard Keynes developed alternative theory of macroeconomics: Advocated government intervention to bring an end to the Great Depression. Focused on boosting demand for output, not flexible
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ch11asadinteraction - Aggregate Supply & Aggregate...

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