Expected future prices o corrections of past errors

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Expected future prices o Corrections of past errors in expectations o *Also, anything that shifts LRAS Equilibrium o AD shift o LRAS shift o SRAS shift The Great Recession o December 2007 to June 2009 o Real GDP fell by 8.9% Using the AS-AD model Begin with the model in equilibrium Determine which curve(s) to shift and in which direction(s) Shift the curve(s) Determine new SR equilibrium and LR equilibrium Compare equilibrium(s) with starting point Application 1: AD increase
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Example: Increase in expected income o Aggregate demand shifts upward to AD1 o Output prices go up o Short run results Prices (output prices) go up   partial adjustment Real GDP goes up (greater than full employment) Unemployment rate goes down Our economy was in this situation in the beginning of 2007 Is everyone happy? Not all prices have adjusted The workers who signed a one or two year contract, but  prices all over the economy goes up and so the goods  and services they are buying are more costly In real terms, real wages have fallen Adverse effect on the worker and seller If all prices rise uniformly there’s no change in supply and we’re  back to the long run again As input prices adjust the SRAS shifts up until it gets you back  to LRE at point c o Long run results Prices goes up completely GDP goes back to normal Unemployment goes back to normal Aggregate supply shifts Bad weather season
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03/06/2013 14:28:00
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03/06/2013 14:28:00
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