Lecture 24AGEC 217 1st EditionOutline of Last Lecture I. Aggregate Supply ShiftsII. Aggregate Demand ShiftsIII. Reasons that the Demand ShiftsA. Definition of Recessionary GapB. Definition of Inflationary GapIV. Sticky PricesOutline of Current Lecture I. Stuck Aggregate DemandA. Sticky WagesB. Sticky PricesC. Sticky Prices GraphII. Unemployment and InflationA. Phillip’s CurveCurrent LectureThis lecture continues on with looking at why the aggregate demand gets stuck in one place. First we need to set up the circumstances of when this occurs. This happens when the aggregate demand curve has shifted to the left. This indicates that the economy is in a recession and there is high unemployment. Prices have gone down, a new equilibrium has been formed, and there is less of a risk for inflation. The reasons the aggregate demand gets stuck is due to sticky wages and sticky prices. These both prevent the equilibrium from moving back to where it was before the shift, after the aggregate demand shifts back to the right. The sticky wage concept is the same as what is was when previously discussed. The graph below illustrates the concept of sticky prices. P is the price, Q is the quantity, S is the supply curve, D is the demand curve, and E is the equilibrium point. This graph shows that a new equilibrium is not formed. Instead we move across the demand curve and stay at the same price. Q1 is the new quantity at that point. 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.Another term that goes with sticky prices is menu cost. This means that there is always some cost to change prices. The expenditure multiplier is when a change in spending has a more than proportionate change in GDP.This can be phrased as: ∆Y/∆spending is greater than 1. ∆Y refers to the change in GDP. For example: a $100 taxrebate yields >$100 increase in GDP. The link between unemployment and inflation can be shown through a Phillip’s curve. This curve illustrates that when inflation is increasing, unemployment is decreasing. It is also true that when unemployment is increasing, inflation is decreasing. This lecture ends chapter
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