Chapter 10 Dynamic Change Economic Fluctuations in the Aggregate Supply Aggregate Demand Model anticipated change foreseen in time to make adjustments o do not cause equilibrium disruptions decision makes plan for change no booms or busts long run equilibrium short run equilibrium unanticipated change not foreseen appropriate adjustments were not made causes equilibrium disruptions disequilibrium no economic growth unanticipated increase in aggregate demand o o causes increases in real wealth fall of interest rate optimism about future rising incomes abroad or depreciation of domestic currency short run output higher than potential price levels rise unexpectedly resource prices and interest rates fixed and producer profits are higher than normal long run resource prices and interest rates rise SRAS shifts left return to full employment and normal profits and price level is permanently higher unanticipated decrease in aggregate demand o causes decrease in real wealth rise of interest rate pessimism about the future falling incomes abroad or appreciated of domestic currency short run output lower than potential price level falls unexpectedly resource prices and interest rates fixed and producer profits are lower than normal long run resource prices and interest rates fall SRAS shifts right return to full employment and normal profits and price level is permanently lower resource prices are downward sticky o unanticipated in short run aggregate supply causes favorable supply shock Short run output higher than potential price level falls unexpectedly resource prices and interest rates fixed producer profits are higher than normal Long run favorable conditions come to an end SRAS shifts left and returns to original position return to full employment normal profits no changes in prices or output in the long run o unanticipated decrease in short run aggregate supply causes unfavorable supply shock short run output lower than potential price levels rise unexpectedly resource prices and interest rates fixed and producer profits are lower than normal long run unfavorable conditions come to an end SRAS shifts right and returns to original position return to full employment normal profits no changes in prices or output in the long run recessions and booms Unanticipated changes in AD or SRAS can disrupt the economy but changes in resource prices and interest rates return the economy to long run equilibrium resource market adjustments o recession GDP less than YF weak demand for resources causes unemployment resource prices then fall return to full output boom GDP greater than YF o strong demand for resources causes greater than normal profits resource price then rise return to full output loanable funds market adjustments recession GDP less than YF o weak demand for borrowing interest rates then fall return to full output o boom GDP more than YF strong demand for borrowing drives up interest rates return to full output All content belongs to Dr Sherron of Florida State University I do not own this material I will remove the material upon request of Florida State University
View Full Document
Unlocking...