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MGEA06H3 (157)
Iris Au (146)
Lecture

# Introduction to Macroeconomics: Math App - Lecture 012

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School
University of Toronto Scarborough
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Winter

Description
14 February 2013 CHAPTER 23: OUTPUT AND PRICES IN THE SHORT RUN [CONT’D] An increase in AE would lead to an increase in Y*. How much Y* will increase? It depends on the slope of the AS curve. Flat AS 1 0 ∆ in P = P *,1 ,0 ∆ in Y* = Y –Y* Steep AS 2 0 ∆ in P = P – P ∆ in Y* = Y –Y* ,0 For any given shift in AD:  Price changes by a larger amount if the AS is steep  Y* changes by a larger amount if the AS is flat Implications on Fiscal Policy Since changes in T, TR and G affect AE, the above analysis helps the government to design and implement fiscal policy:  The slope of AS determines how much Y* will change when there is a change in fiscal policy o If AS is flat, a given change in fiscal policy will lead a relatively large ↑ in Y and a small ↑ in P o If AS is steep, the same change in fiscal policy will lead to a relatively small ↑ in Y and a large ↑ in P  The slope of the AS curve is critical in determining the magnitude of the policy required to get the economy back to YFE: o If AS is steep, a large change in fiscal policy is needed o If AS is flat, a relatively small change in fiscal policy is needed A Deflationary Gap If AS is steep, a large ↑ in G is needed  G↑ then AE ↑ to AE’ and AD shifts to the right to AD’ 0  At P , excess demand  Inventories ↓ and P↑ 2  P↑ then AE↓ to AE  Pt B’ is the new equilibrium: o Y↑ to Y FE 1 o P↑ to P If AS is flat, a small ↑ in G is good enough  G↑ then AE↑ to AE and AD shifts to the right to AD 2 0  At P , excess demand  Inventories↓ and P↑ 2  P↑ then AE↓ to AE  Pt C’ is the new equilibrium: o Y↑ to Y F
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