ECON 12:7

ECON 12:7 - make a boost in output In the long run what matters is the intersection between aggregte demand and long run aggregate supply(which is

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Aggregate Demand Y = C + I + G + NX Downward sloping because of wealth effect, interest rate effect, exchange rate effect Many variables can shift aggregate demand to the left or right LRAS Curve might shift, due to changes in natural resources Major component of cost of production will not increase Some firms can make profits if the price level is higher than the expected rpcei level because they can sell the serces that they are pricing for more than what is expected - profit by the spread of the actual price level and the expected price level\ - Firms will boost production in this case (when real wages are down) o When output increases, unemployment decreases Menu costs make prices stick in the short run - Fed increases money supply - firms that do not adjust their prices will boost productions, because all the households will want to shop there (since the prices are lower than normal) Realized price level is above the expected price level
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Unformatted text preview: make a boost in output In the long run, what matters is the intersection between aggregte demand and long run aggregate supply (which is equal to Y) (which is vertical)-the intersection happens at Short run aggregate supply (upward sloping) Stock Market Crash-Will change aggregate demand – shift down to the left-Y = AxF(K,L,H,N) = LRAS – stock market crash does not destroy machines, population, human resources, natural resources, or technology-C falls, SR equilibrium lower, and unemployment falls o Over time, Expected Price (Pe) falls, so SRAS shifts right, until LR equilibrium at C. Y and unemployment back at initial levels Oil prices increases-SRAS shifts to the right,-We get higher prices, higher unemployment, and lower production-Stagflation (lower wages, higher prices) o Government has to start hiring more public employees o Create occupation, expand monetary policy...
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This note was uploaded on 01/14/2012 for the course ECON 002 taught by Professor Eudey during the Fall '08 term at UPenn.

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