EC202 1nd Edition Lecture 24Outline of Last Lecture I. Short run conclusionsII. Cyclical demandOutline of Current Lecture II. Aggregate demand and supplyIII. Equation of exchangeIV. Velocity of moneyCurrent Lecture-aggregate demand and supply-demand and supply curves for national output -used to understand and predict -to explain price and output changes-in both the short-run and long-run-the curves in this section assume price and output are constant in equilibrium-equation of exchange: states that the quantity of money multiplied by the velocity of money equals nominal GDP -M ´ V = P ´ Y-velocity of money: the average speed with which a dollar circulates in the economy as people use it to buy goods and services — nominal GDP divided by quantity of money-the equation of exchange can be viewed as forming a demand for output relation -(M/ P) ´ V = Y-as the price level increases, if the money supply and its turnover are constant, then output demanded must be reducedThese 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.-the real money supply is lower so it can buy fewer goods -summary1. long run: prices are flexible, output and employment are always at their natural rates, and the classical theory appliesshort run: prices are sticky; shocks can push output and employment away from their natural rates 2. aggregate demand and supply: a framework to analyze economic
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