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CSU ECON 204 - Aggregate Supply and Macroeconomic Equilibrium

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ECON 204 1st Edition Lecture 10 Outline of Last Lecture XIV. Aggregate DemandA. Why the ADC is downward slopingB. Shifts of the ADCOutline of Current LectureXV. Aggregate SupplyA. Shifts in short-run aggregate supplyB. Long-run aggregate supply curveXVI. Macroeconomic EquilibriumA. Short-runB. Long-runC. Supply and demand shocksCurrent LectureXV. Aggregate Supply Aggregate supply curve: shows the relationship between the aggregate price level and the quantity of aggregate output in the economy.Nominal wage: is the dollar amount of the wage paid.Sticky wages: nominal wages that are slow to fall even in the face of high unemployment andslow to rise even in the face of labor shortages.The short-run aggregate supply curve is upward-sloping because nominal wages are sticky in the short run, a higher aggregate price level leads to higher profits and increased aggregate output in the short run.A. Shifts in short-run aggregate supplyShifts in the short-run aggregate supply curve are caused by changes in:Commodity pricesCommodity prices fall: short-run aggregate supply increasesCommodity prices rise: short-run aggregate supply decreasesNominal wagesNominal wage fall: short-run aggregate supply increasesNominal wage rise: short-run aggregate supply decreasesThese 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.Productivity leading to changes in producers’ profitsWorkers become more productive: short-run aggregate supply increasesWorkers become less productive: short-run aggregate supply decreasesB. Long-run aggregate supply curveThe long-run aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.XVI. Macroeconomic EquilibriumThe AS-AD model uses the aggregate supply curve and aggregate demand curve together to analyze economic fluctuations. A. Short-runShort-run macroeconomic equilibrium: when the quantity of aggregate output supplied is equal to quantity demandedShort-run equilibrium aggregate price level: the aggregate price level in the short run macroeconomic equilibriumShort-run equilibrium aggregate output: the quantity of aggregate output produced at the short-run macroeconomic equilibriumB. Long-runThe economy is in long-run macroeconomic equilibrium when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curveRecessionary gap: when aggregate output is below potential outputInflationary gap: when aggregate output is above potential outputOutput gap: percentage difference between actual aggregate output and potential outputOutput gap = ((actual aggregate output – potential output) / potential output) x100C. Demand and supply shocksThe economy is self-correcting when shock to aggregate demand affect aggregate outputin the short but not the long run. An initial negative demand shock reduces the aggregate price level and aggregate outputand leads to higher unemployment in the short run until an eventual fall in nominal wages in the long run increases short-run aggregate supply and moves the economy back to potential output. If a recession occurs from a supply shock it is more likely to be severe than from a demand shock. Fiscal policy affects government spending and monetary policy affects investment. It is desirable to raise both government spending and investment to bring up aggregate demand.Stagflation: high inflation combined with high unemployment and stagnant


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