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Section17 - UNIVERSITY OF CALIFORNIA BERKELEY Department of...

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UNIVERSITY OF CALIFORNIA, BERKELEY Dorian Carloni Department of Economics ECON 100B, Fall 2011 SECTION 17: The Aggregate Demand and Supply Model, Part 1 17.1. The Aggregate Demand and Supply Curves 17.1.1. The Aggregate Demand Curve ° The aggregate demand curve, AD, is the inverse relationship between in°ation and economic output when the goods market is in equilibrium . ° The AD curve is downward sloping because a rise in in°ation causes: 1. The monetary authorities to increase real interest rates to control in°ation, which 2. Reduces planned expenditures, and 3. Reduces the equilibrium level of output ° The AD curve will shift whenever there is: 1. A change in autonomous consumption, 2. A change in autonomous investment, 3. A change in autonomous government purchases, 4. A change in autonomous taxes, 5. A change in autonomous net exports, or 6. A change in autonomous monetary policy 17.2.1 The Aggregate Supply Curves 1. LRAS: ° The long-run aggregate supply curve, LRAS, is the vertical relationship between in°ation and potential economic output . ° The LRAS curve is vertical because a rise in in°ation causes: 1. No change in the factors of production, 2. No change in total factor productivity, and 3. No change in the natural rate of unemployment due to complete wage and price °exibility.
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