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Chapter 23 Output and Prices i.pdf

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Simon Fraser University
ECON 105
Ingrid L.Stefanovic

Many economic events - esp. changes in the world prices of raw materials - cause AD and AS shocks both AD and AS shocks in the same economy. The overall effect on GDP in that economy depends on the relative importance of the two separate effects. AD shocks cause the price level and real GDP to change in the AD shocks same direction; both rise with an increase in AD, and both fall with a decrease in AD. When the AS curve is upward sloping, an AD shock leads to a AD shocks - the change in the price level. As a multiplier when P varies result, the multiplier is smaller than the simple multiplier. For any given price level, the AD curve shows the level of aggregate demand curve real GDP for which desired aggregate expenditure equals actual GDP. If their unit costs rise with AS curve - prices and output, price-taking firms will produce more only if price output (1) increases. They will produce less if the price falls. Price-setting firms will increase their prices when they expand their output into AS curve - prices and the range where unit costs are rising. They will eventually decrease their prices output (2) if a reduction in their output leads to a reduction in unit costs. The actions of both price-taking and AS curve - prices and price-setting firms cause the price level and the supply of output to be output (3) positively related - the AS curve is positively sloped. AS shocks cause the price level and real GDP to change in opposite AS shocks directions. With an increase in supply, the price level falls and GDP rises; and vice versa. AD and AS shocks are labelled changes in the according to their effect on macroeconomic real GDP. Positive shocks equilibrium
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