ECON 2 Lecture Notes - Lecture 29: Aggregate Demand, Production Function, Discouraged Worker
27 Aug 2020
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Document Summary
When recessions are caused by too low aggregate demand, governments can try to stimulate demand. When inflation is caused by too high aggregate demand, governments can try to restrain aggregate demand. Before 1940, the economy endured pronounced business fluctuations and inflation was rare. Since world war ii the business fluctuations have been much less severe, but inflation has been a common occurrence. How successful government policy can be is a question to be explored throughout the text. Potential gdp: the real gdp that the economy could produce if the labour force and other resources were fully employed. Production function: mathematical depiction of the relationship between an economy"s inputs and outputs. The capacity to produce: potential gdp and the production function. Potential gdp is what the economy could produce if its labour force were fully employed. An economy"s production function shows the volume of output that can be produced from given inputs (labour, capital) given the available technology.
