ECON 201 1st Edition Lecture 33Outline of Last Lecture I. The Slope of the Aggregate Demand Curvea. Definition of wealth effectb. Definition of interest rate effectc. Definition of foreign price effect or exchange-rate effectII. Why the Aggregate Demand Curve Might Shifa. Definition of monetary policyIII. The Aggregate Supply Curvea. Definition of aggregate supply curveIV. The Long Run Aggregate Supply Curve a. Definition of natural rate of outputOutline of Current Lecture I. Short-Run Aggregate Supply (SRAS)II. Economic Fluctuationsa. Definition of economic fluctuationsIII. The Effect of a Shif in Aggregate DemandIV. Real Life EconomicsCurrent LectureI. Short-Run Aggregate Supply (SRAS)The SRAS curve is upward sloping. There are a few explanations for this positive slope: expectations of wages and prices, sticky prices and wages, and price confusion. These are all factors that can affect the SRAS curve. In the long-run equilibrium the wages, prices, and expectations adjust at potential GDP. This also shows unemployment at its natural rate. There are two reasons why an SRAS curve might shif; everything that shifs the long-run aggregate supply shifs the short-run aggregate supply, too. These two reasons are changes in productivity and prices of widely used inputs, such as energy or labor. The slope of the SRAS matters becauseif the slope isn’t upward, changes in aggregate demand don’t change output at all, and the model becomes useless. On the other hand, if the aggregate supply shifs upward, then slopes in the aggregate demand do affect output and unemployment. II. Economic 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.Economic fluctuations are caused by events that shif the aggregate demand and/or the aggregate supply. There are four steps to analyzing economic fluctuations. 1. Determine whether the event shifs the aggregate demand or the aggregate supply.2. Determine whether the curve shifs lef or right.3. Use the aggregate demand-aggregate supply diagram to see how the shif changes Y andP in the short run.4. Use the aggregate demand-aggregate supply diagram to see how the economy moves from new short run equilibrium to new long run equilibrium. III. The Effects of a Shif of Aggregate DemandIn the example event of a stock market crash, it affects the consumption and aggregate demand through consumer confidence. We can use the four steps described above to analyze this economic situation. 1. This event affects consumption, so it will shif the aggregate demand curve.2. Consumption will fall, so the aggregate demand curve will shif to the lef.3. In the short run equilibrium, Y (real GDP) and P (price level) are lower and unemployment is higher.4. Over time, the SRAS shifs right until the long run equilibrium, the consumption, the real GDP, and the unemployment are back at their initial levels. IV. Real Life EconomicsTwo big aggregate demand shifs that occurred in the past were the Great Depression and the WWII boom. With the Great Depression, from 1929-1933, the money supply fell 28% due to problems in the banking system. Stock price levels fell 90%, reducing consumption and investment. Real GDP fell 27%, price levels fell 22%, and unemployment rose from 3% to 25%. The second event, the WWII boom, occurred from 1939-1944. Government rose from $9.1 billion to $91.3 billion. Real GDP rose 20%, price levels rose 20%, and unemployment fell from 17% to
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