Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Equilibrium • Equilibrium price and quantity are found where the AD and AS curves intersect. – At any price level above equilibrium sellers are faced with surpluses and are forced to reduce production and price level. – At any price level below equilibrium buyers are faced with shortages and are forced to pay more, encouraging suppliers to produce more. Changes in Equilibrium • Changes in AD have different effects on price level and output depending on which range of the AS curve the economy is in – If price levels increase this is known as demand-pull inflation • Increases in AS have a positive effect on both price level and output. – When AS shifts right, price levels fall or stabilize, but output increases. • Decreases in AS have a negative effect on both price level and output. – When AS shifts left, price levels rise, and output decreases (known as cost-push inflation or stagflation). Policy Responses to Recession Policymakers may respond to a recession (a decrease in aggregate demand) in one of the following ways: Take action to increase aggregate demand by using monetary and fiscal policy Output and employment rise, but so do price levels. Do nothing and wait for prices and wages to adjust. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Contraction in Aggregate Demand with NO Government Response... Price Level 2. …causes output to fall in the short run… Long-run aggregate supply Short-run aggregate supply, AS1 AS 2 A P1 P2 B P3 1. A decrease in aggregate demand… C AD 0 Y2 Y1 3. …but over time, the short-run aggregate-supply curve shifts… Aggregate demand, AD1 2 4. …and output returns to its natural rate. Quantity of Output The Effects of an Adverse Shift in Aggregate Supply: Stagflation Adverse shifts in aggregate supply cause stagflation—a combination of recession and inflation. Output falls and prices rise. Policymakers who can influence aggregate demand cannot offset both of these adverse effects simultaneously. Accommodating an Adverse Shift in Aggregate Supply... Price Level 1. When short-run aggregate supply falls… Long-run aggregate AS 2 supply P3 C P2 A Short-run aggregate supply, AS1 2. …Policymakers can increase AD P1 3....which causes the price level to rise 4. …but keeps output at its natural rate. 0 AD2 Aggregate demand, AD1 Natural rate of output Quantity of Output THE INFLATION-UNEMPLOYMENT RELATIONSHIP • Normally, there is a short-run trade-off between the rate of inflation and the rate of unemployment • Aggregate supply shocks though can cause both higher rates of inflation and higher rates of unemployment • Regardless, over the long-run there is no significant trade-off between inflation and the rate of unemployment