ECO105Y1 Lecture Notes - Lecture 16: Output Gap, Stagflation, Fallacy
Document Summary
Economics is a science of thinking in terms of models joined to th e art of choosing models which are relevant to the contemporary worl. An economic model is a simplified representation of the real world, focusing attention on what"s important for understanding. Economic models assume all other things not in the model do not change. Price and quantity changes are the result, not the cause, of economic events. Thinking like an economists means analyzing a situation using compar ative statics. Start with one equilibrium situation (intersection of supply and demand, other things the same) Compare resulting equilibrium situation (intersection of supply and demand after the change) in terms of price and quantity. Model of aggregate supply & aggregate demand explains. When the economy hits targets of potential gdp, full employment, stable prices. When the economy misses targets, resulting in business cycles, unemployment, inflation. Caused by shifts of aggregate supply & aggregate demand.
