Textbook Guide Economics: Aggregate Demand, Aggregate Supply, Nominal Rigidity

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1 Dec 2016
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Aggregate Demand and Aggregate Supply
Three Key Facts about Economic Fluctuations
Fact #1: Economic fluctuations are irregular and unpredictable.
Fluctuations in the economy are often called the business cycle.
The figure above shows real GDP, investment spending, and
unemployment rates since 1965. Recessions are highlighted.
Fact #2: Most macroeconomic quantities fluctuate together.
Although they fluctuate together, they fluctuate by different amounts.
When monitoring short-run fluctuations, it does not matter which measure
of economic activity is analyzed.
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Fact #3: As output falls, unemployment rises.
The changes in the output of goods and services in the economy is
strongly correlated with utilization of its labor force.
When firms choose to produce less, they employ fewer workers.
Explaining Short-Run Economic Fluctuations
The classical view is that money is a veil. It does not matter if the money
supply doubles because that will double prices and wages.
Most economists believe that this applies only in the long-run.
The model of aggregate demand and aggregate supply is the model
that most economists use to explain short-run fluctuations in the economy
away from the long-run trend.
The aggregate-demand curve is the curve that shows the quantity of
goods and services that households, firms, the government, and
customers abroad want to buy at each price level.
The aggregate-supply curve shows the quantity of goods and services
that firms will produce at each price level.
The wealth effect states that if the price level falls, your real wealth
increases.
In summation, when the price level falls, consumers are wealthier, interest
rates fall, and the currency depreciates which stimulates the demand for
net exports.
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The Aggregate Demand-Curve
Many factors affect the quantity of goods and services demanded at a
given price level.
These include: changes in consumption, changes in investment, changes
in government spending, or changes in net exports.
The Aggregate Supply-Curve
The long-run aggregate-supply curve is vertical at the natural rate of
output.
The quantity supplied does not depend on the price level.
The shifters of the long-run aggregate-supply curve include changes in
labor, changes in capital, changes in natural resources, and changes in
technology.
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