ECO 1102 Lecture Notes - Lecture 16: Aggregate Demand, Aggregate Supply
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Chapter 14-Part 1
(Chapter 13 was not covered this year: Winter 2016)
AGGREGATE DEMAND AND AGGREGATE SUPPLY
Economic activity fluctuates from year to year.
Recession: a period of falling incomes and rising unemployment
Depression: a severe recession
The variables that we study in this chapter are largely those we have already seen in previous
GDP – Unemployment – Interest rates – Exchange rates – Prices
The model of aggregate demand and aggregate supply is often used by economists to analyze short-run
fluctuations in the economy
THREE FACTS ABOUT ECONOMIC FLUCTUATIONS
FACT 1: Economic fluctuations are irregular and unpredictable. Business cycles
FACT 2: Most macroeconomic quantities fluctuate together.
FACT 3: As output falls, unemployment rises.
EXPLAINING SHORT-RUN FLUCTUATIONS describing the patterns that economies experience as they
fluctuate over time is easy. Explaining what causes these fluctuations is more difficult. The theory of
economic fluctuations remains controversial.
The Assumptions of Classical Economies The classical view is sometimes described by saying, “Money
is a veil.” What is important, however, are the real variables and the economic forces that determine
The Reality of Short-Run Fluctuations Most economists believe that classical theory describes the
world in the long run but not in the short run. To understand how the economy works in the short
run, we need a new model. The new model focuses on how real and nominal variables interact.
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