ECON103 Chapter Notes - Chapter ECON103: Aggregate Supply, Aggregate Demand, Stagflation
The Effects of a Shift in Aggregate Supply
• Stagflation: a period of falling output and rising prices
• An Adverse Shift in Aggregate Supply:
• Shifts in aggregate supply can cause stagflation—a combination of recession (falling output)
and inflation (rising prices).
• Policymakers who can influence aggregate demand can potentially mitigate the adverse
impact on output but only at the cost of exacerbating the problem of inflation.
Example-1:
Assuming that a is positive, the short-run aggregate supply curve can be expressed
mathematically as
a. quantity of output supplied = natural rate of output + a × (expected price level - actual price
level).
b. quantity of output supplied = a × (actual price level -expected price level) - natural rate of
output.
c. quantity of output supplied = a × (expected price level - actual price level) - natural rate of
output.
d. quantity of output supplied = natural rate of output + a × (actual price level - expected price
level).
Answer:
The formula is:
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Document Summary
A lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increases the quantity of goods and services demanded. Conversely, a higher price level raises the interest rate, discourages investment spending, and decreases the quantity of goods and services demanded. (option a) Classical macroeconomic theory is based on the assumption that real variables do not depend on nominal variables. The long-run aggregate-supply curve is consistent with this idea because it implies that the quantity of output (a real variable) does not depend on the level of prices (a nominal variable). Thus, the aggregate supply curve is vertical only in the long run. (option d) Any change in the economy that alters the natural rate of output shifts the long run aggregate- supply curve. If there is an increase in education level of workers, or it investment by firm, or technical advancements, then the output increases, which shifts long-run supply curve to right.