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Chapter 23 Output and Prices in the Short Run.docx

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Economics (Arts)
ECON 209
Mayssun El- Attar Vilalta

Chapter 23 Output and Prices in the Short Run 231 The Demand Side of the Economy Exogenous Changes in Price LevelChanges in Consumption rise in price level lowers real value of money held by private sectionfall in desired consumptiondownward shift in AE curveChanges in Net exports rise in domestic price levels shifts net export function downdownward shift in AE curve The Aggregate Demand CurveAggregate demand AD curve relates equilibrium real GDP to price levelFor any given P the AD curve showConsider rise in price level the AE curve shifts down but we move along AD curveAggregate demand curve is negatively sloped for 2 reasons o A fall in price level leads to rise in private sector wealth which increases desired consumption and thus leads to increase in equilibrium GDP o Fall in price level for a given exchange rate leads to rise in net exports and thus leads to increase in equilibrium GDPShifts in AD Curve o Any shock that increases equilibrium GDP at a given price level shifts the AD curve to the right shifts entire AD curve o Horizontal shift of AD curve is simple multiplier times the change in autonomous spending o But what about supply side of economyFor any give P AD curve shows level of real GDP for which desired aggregate expenditure equals actual GDP 222 Supply Side of Economy The Aggregate Supply AS CurveAS curve relates price level to quantity of output that firms would like to produce and sellAS curve is drawn for a given o Level of technology o Set of factor pricesPositive Slope of AS Curve o As unit costs rise with output firms will produce more output only if prices increase AS curve is upward sloping
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