ECON 102 1st Edition Lecture 26 Outline of Last Lecture 1 The Aggregate Supply Curve a Short run Aggregate Supply Curve b Long run Aggregate Supply Curve Outline of Current Lecture I Short run Aggregate Cont II Shocks a Demand Side Shocks b Supply Side Shocks c Negative Side Shocks Current Lecture AS AD Model Uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations The economy is in short run macroeconomic equilibrium when the quantity of aggregate output supplied is equal to the quantity demanded The short run equilibrium aggregate price level is the aggregate price level in the shortrun macroeconomic equilibrium Short run equilibrium aggregate output is the quantity of aggregate output produced in the short run macroeconomic equilibrium Demand Side Shocks o Movement of AD demand curve o Caused by changes in wealth expectations stock of physical capital gov t policies o RESULT Aggregate price level and aggregate output move in the same direction Supply Side Shocks o Movement of AS curve o Caused by changes in commodity prices productivity and nominal wages o RESULT Aggregate price level and aggregate output move in the opposite direction There is a recessionary gap when aggregate output is below potential output These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute There is an inflationary gap when aggregate output is above potential output The output gap is the percentage difference between actual aggregate output and potential output The economy is self correcting when shocks to aggregate demand affect aggregate output in the short run but not in the long run Negative supply shocks pose a policy dilemma a policy that stabilizes aggregate output by increasing aggregate demand will lead to inflation but a policy that stabilizes prices by reducing aggregate demand will deepen the output slump Policy in the face of supply shocks o There are no easy policies to shift to short run aggregate supply curve o Policy Dilemma A policy that counteracts the fall in aggregate output by increasing aggregate demand will lead to higher inflation but a policy that counteracts inflation by reducing aggregate demand will deepen the output slump
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