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MacroIII_Chapters11-15

MacroIII_Chapters11-15 - Macroeconomics Dr.Safarzadeh...

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Macroeconomics Dr. Safarzadeh Chapters 11 - 15
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CHAPTER 11 Aggregate Supply and Aggregate Demand Aggregate Demand (AD)/ Aggregate Supply (AS) Model AS: Quantity supplied of GDP depends on existing labor (L), capital (K), and state of the technology (T), GDP = f(L, K, T). In the short-run, capital and state of technology are fixed. Therefore, GDP depends on the labor market equilibrium and the number of labor available for work, GDP = f(L). Potential GDP: The full-employment GDP is called Potential GDP . Over the business cycle, the real GDP fluctuates around the potential GDP Long-Run Aggregate Supply (LAS): In macroeconomics, the long- run is the period of time that prices and wages are flexible and the GDP is at potential GDP. LAS is the relationship between GDP and the price level when GDP is at potential GDP.
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CHAPTER 11 Aggregate Supply and Aggregate Demand LAS and Potential GDP: Along the LAS, the relationship between prices stays the same. A 10% increase in price level increases price of goods and economic resources including wages by 10%.
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CHAPTER 11 Aggregate Supply and Aggregate Demand Short-Run Aggregate Supply (SAS): Sort-run in macroeconomics is the period of time that AS can be below or above the potential output. SAS is the relationship between the quantity of the real GDP and the price level.
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CHAPTER 11 Aggregate Supply and Aggregate Demand Movement Along LAS and SAS: If price of goods, services, and economic resources change at the same proportional as the price level, then the relative prices stay the same. This is movement along the LAS to a higher price level. If price level rises but money wage stays the same, the real wage is decreasing. This will result in more labor being hired and more production will take place. This will be a movement along the SAS.
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CHAPTER 11 Aggregate Supply and Aggregate Demand AS Shifters: Changes in full-employment quantity of labor, changes in capital, and advances in technology. Theses changes shifts both SAS and LAS. Physical Capital, Human Capital: Increase in human capital through investment in education and training of labor increases production by shifting both SAS and LAS to the right.
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CHAPTER 11 Aggregate Supply and Aggregate Demand Supply Shocks: One important SAS shifter is supply shocks. Oil price increase, major draught or bad weather resulting in major reduction in supply of agricultural products are examples of supply shocks. These shocks shifts SAS to the left. Aggregate Demand (AD): The real GDP is measured as GDP = C + I + G + + X – M. Components of the GDP are the demands by households, firms, government, and international for goods and services. Therefore, this equation also represents the aggregate demand. Movements Along the AD: Movements along AD are due to changes in price level. Increase in price level decreases real money (the purchasing power of money) and the quantity demanded of GDP decreases.
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CHAPTER 11 Aggregate Supply and Aggregate Demand AD Shifters: Fiscal policy, Monetary Policy, Wealth Effect, Expectations, The world Economy.
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