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econ study guide - Chapter 11: Aggregate Supply and Demand...

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Chapter 11: Aggregate Supply and Demand Aggregate supply (AS) : Quantity supplied of GDP depends on existing lavor (L), capital (K), and state of the technology (T), GDP = f(L,K,T). In SHORT RUN, K & T are fixed, so GDP = f(L) Potential GDP : full-employment GDP. In a business cycle real GDP fluctuates around this Long-run AS: GDP is at potential GDP. Price is flexible Short-run AS: AS can be below/above potential output. Direct relationship between real GDP and price level AS SHIFTERS Changes in full-employment, quantity of labor, changes in capital, advances in technology. Shifts both SAS and LAS. Increase in human capital through investment in education and training of labor increases production by shifting both SAS and LAS to the right. Supply Shocks: OIL PRICE INCREASE, major draught or bad weather resulting in reduction in supply of agricultural products are example of supply shocks. SAS shifts left. Increase in cost of inputs (W) Expected prices As P + -> Pe + -> W + and AS shifts to the left. Aggregate Demand (AD) : The real GDP. Real GDP = C + I + G + X – M. Movement along the AD: Movements along AD are due to changes in price level. Increase in price level decreases real money (purchasing power of money) and the quantity demanded of GDP decreases. AD SHIFTERS Fiscal Policy and Monetary Policy: Expansionary policies shift AD to the right and contractionary policies shift AD to the left. Wealth Effect: Increase in stock prices and a boom in the stock market increases consumer confidence and the wealth in the economy. This has a positive effect on consumption and increases AD by shifting it to the right. Expectations: expectations of future income increase or future tax cuts increases AD today and shifts AD to the right. World economy: A boom in the economy of other countries increases demand for exports and results in an increase in AD and a shift in AD to the right. Recessionary Gap: When the real GDP is below the full-employment GDP. Results in expectations of price and wage decrease. Expansionary Gap: When the real GDP is above the full-employment GDP. Results in expectations of price and wage increase
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Equilibrium in Goods Market Gives the IS Curve: IS is derived from setting Income Y equal to spending Z. Y = Z = C(Y - T) + I(i) + G
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This note was uploaded on 04/04/2012 for the course ECON 205 taught by Professor Kamrany during the Spring '07 term at USC.

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econ study guide - Chapter 11: Aggregate Supply and Demand...

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