UVA ECON 2020 - 9-28-2012Handout (6 pages)

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9-28-2012Handout



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9-28-2012Handout

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Pages:
6
School:
University Of Virginia
Course:
Econ 2020 - Principles of Economics: Macroeconomics

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Using the AS AD Model Evolution of Macro Theory AS AD Applications Elias Yannopoulos September 28 2012 Elias Yannopoulos AS AD Applications Using the AS AD Model Evolution of Macro Theory AS AD Methodology A couple points Y Full employment output output where u u Real vs Nominal economic changes Step to evaluate the AS AD model 1 Set up the model in equilibrium 2 Determine which curve s to shift 3 Determine the direction of the shift s 4 Determine the new SR equilibrium 5 Determine the new LR equilibrium Elias Yannopoulos AS AD Applications Using the AS AD Model Evolution of Macro Theory AS AD Examples Ex SRAS shift in Ex SRAS shift out Ex AD Shifts Recessionary Gap the amount by which equilibrium output is below potential output Inflationary Gap the amount that aggregate expenditures are above potential output Feedback a concept where movements of the SRAS can lead to further movements in AD Ex graph Elias Yannopoulos AS AD Applications Using the AS AD Model Evolution of Macro Theory AS AD and Classical economics The fundamental assumption in classical economics is that all prices adjust There are no sticky prices This assumption leads to 3 main conclusions No extended unemployment No significant contractions An inherently stable economy Focus on supply LRAS determines Y All sunshine and rainbows Ex graph Elias Yannopoulos AS AD Applications Using the AS AD Model Evolution of Macro Theory Keynesian Economics The key assumption for Keynes is that some prices are inflexible especially downward Money illusion and contracts Since input prices do not adjust then output must adjust This leads to output below Y An economy that is inherently unstable Focus on demand AD determines Y Government intervention is necessary to stabilize the economy Elias Yannopoulos AS AD Applications Using the AS AD Model Evolution of Macro Theory Classical vs Keynesian Summary Key Time Period Price Flexibility Savings Key Side of Market Market Tendency Employment level Government Intervention



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