ECON 104 Study Guide - Quiz Guide: Autonomous Consumption, Potential Output, Household Debt
Document Summary
There is no relationship between potential gdp and the price level. Any departures from potential gdp will fix itself over time. Potential gdp is the aggregate supply in the long run. If ad decreases: new intersection is disequilibrium (surplus; unemployment>natural rate: wages fall (ppl. willing to work for less), 2) prices fall, 3) sales rise,4) employment rises. Equilibrium is reached at a lower price level. Keynes agreed mostly with the classical model, but stated: In the long run, we are all dead. He was saying that the long run is an inappropriate period of time for policy decisions, because the unemployed are suffering economically. Economy did not return to potential gdp during the great depression; keynes" general theory was then published. During the great depression, ad fell well below potential gdp, as decreased less than ad. Total ad takes into account components of gdp (c + i + g + ne)
