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Macro Midterm 3 Notes... Chapter 26 and 27

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Economics 1022A/B
Lanfeng Yu

Macro Midterm 3 Chapter 26 and 27 Chapter 26 Aggregate SupplyAggregate SupplyAggregate Demand model explains how real GDP and the price level are determined and how they interactASAD model isnt an application of a competitive marketASAD is a model of an imaginary market for the total of all final goods and services that make up real GDP Quantity in this market is real GDP and the price is the price level measured by the GDP deflator Quantity Supplied and SupplyQuantity of real GDP supplied is the total quantity of goods and services valued in constant baseyear2002 dollars that firms plan to produce during a given periodThis quantity depends on o Quantity of labour employed o Quantity of physical and human capital o State of technologyQuantity of capital technology and population are fixedQuantity of labour is variable as it depends on decisions made by households and firms about the supply and demand for labourThe labour market can be o Full EmploymentQuantity or real GDPPotential GDP o Above full employment o Below full employmentAggregate supply is the relationship between the quantity of real GDP supplied and the price levelAggregate can be divided into two time frames short and longrun LongRun Aggregate SupplyThe relationship between quantity of real GDP supplied and the price level when the real wage rate changes in step with the price level to achieve full employmentQuantity of real GDO at full employmentPotential GDP regardless of price levelAlong the longrun aggregate supply curve as price level changes money rate also changes so the real wage is constant and real GDP remains at potential GDPLongrun aggregate supply curve is always vertical and is always located at potential GDp because potential GDP is independent of price levelMovement along the LAS results in changes in the prices of
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