Econ 2203 1st Edition Lecture 26KeyDefinitionsImportant InformationFill in the blankExamplesEquationsOutline Three Facts about short-run economics Aggregate Supply and Aggregate Demand model- Over the long run, real GDP grows about 3% per year on average- In the short run, GDP fluctuates around its trendo Recession : periods of falling real incomes and rising unemploymento Depression : severe recessions (very rare)- Short-run economic fluctuations are often called business cyclesThree facts about short-run economicsFact 1: Economic Fluctuations are irregular and unpredictableFact 2: Most Macroeconomic Quantities fluctuate togetherFact 3: As Output Falls, Unemployment risesExplaining Short-run Economic Fluctuations Recall: To study economy in the long run: - The Classical Dichotomy, the separation of variables into two groups: o Real – quantities, relative priceso Nominal – measured in terms of money- The Monetary Neutrality: Changes in the money supply (price) affect nominal but not real variablesExplaining Short-run Economic Fluctuations Recall: due to Monetary Neutrality - In the long-run, changes in price does not affect real GDP- In the short-run, changes in price affect real GDP- To study the short run, most economists use the model of aggregate demand and aggregate supply to study fluctuationsThese 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 model shows the relationship between supply and demand in the short runSupply and Demand Model - Price of one product- Quantity of one productAggregate Supply and Aggregate Demand Model- Price of all goods and services- Quantity of all goods and servicesThe Long-run Aggregate Supply Curve (LRAS) What determines the quantity of goods and services supplied in the long-run?- It depends on:o Laboro Capitalo Natural resourceso Technology - Economic Growth (real GDP growth in the long run) does NOT depend on: o Price- An increase in P does not affect LRAS (long-run real GDP)- This is consistent to the idea of Classical Dichotomy and Money Neutrality: Money supply does not affect real variables in the long-run- The Natural rate of output (YN) – the amount of output the economy produces when unemployment is at its natural rateWhy the LRAS Curve Might Shif - Any event that changes any of the determinants of YN will shift LRAS. - Determinants:o Laboro Capitalo Natural Resourceso Technology Example: Immigration increases L, increase in (Yn), causes LRAS to shift- Changes in Labor (L or natural rate of unemployment) o Immigration - (shifts right)o Baby-boomers retire -(shifts left)o Government policies reduce natural unemployment rate - (shifts right)- Changes in Capital (K or H) o More Investment in factories, equipment - (shifts right)o More people get college degrees - (shifts right)o Factories destroyed by a hurricane - (shifts left)- Changes in Natural Resources o Discovery of new mineral deposits - (shifts right)o Reduction in supply of imported oil - (shifts left)- Changes in Technology o Productivity improvements from technological progress - (shifts right)Principle of MacroeconomicsLecture Notes > VERY DETAILED > COLOR CODED> Easy to read > May include information that was stated directly from the teacher in
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