ECON 102 Lecture Notes - Lecture 18: Aggregate Supply, Aggregate Demand, Classical Dichotomy
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Economic activity fluctuates from year to year. Def: recession period of declining real incomes and rising unemployment. The classical dichotomy is the separation of variables into real variables and nominal variables. According to classical theory, changes in the money supply only affect nominal variables. Most economists believe that the classical theory describes the world in the long-run but not in the short-run. Beyond a period of several years, changes in the money supply affect prices and other nominal variables, but do not affect real gdp, unemployment, or other real variables. In the short-run, most real and nominal variables are intertwined and the assumption of monetary neutrality is not appropriate. The model of aggregate demand and aggregate supply. Def: model of aggregate demand and aggregate supply the model that most economists use to explain the short-run fluctuations in economic activity around its long-term trend. We can show this model using a graph.