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ECON102 Lecture Notes - Lecture 5: Aggregate Demand, Aggregate Supply, Potential Output

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cerisegiraffe538
13 Feb 2018
School
University of Waterloo
Department
Economics
Course
ECON102
Professor
Mergo Teferi

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ECON102 Full Course Notes
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ECON102 Full Course Notes
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Document Summary

Chapter 26 aggregate supply and aggregate demand. The quantity of real gdp supplied is the total quantity that firms plan to produce during a given period. Aggregate supply is the relationship between quantity between quantity of real gdp supplied and the price level. We distinguish the long-term and short-term with different states of the labour market. Long-run aggregate supply is relationship between quantity of real gdp supplied by firms and the price level when real gdp = potential gdp. Potential gdp is independent of the price level, so long-run aggregate supply curve is vertical at potential gdp. In long run, quantity of real gdp supplied is potential gdp. As price level rises, and money wage rate changes by the same percentage, nothing real changes, so real gdp supplied = potential gdp. Short-run aggregate supply is relationship between quantities of real gdp supplied and price level when wage rate, prices of goods, and potential gdp are constant.

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Related Questions


1. Does the Aggregate Demand (AD) curve always slope downward? Discuss and use explanations (interest rate effect, wealth effects, open economy effect).

2. The Aggregate Supply (AS) curve slopes upward to reflect the profit motive of businesses. So, why there are two versions of the AS curve( i.e. short run and long- run). Discuss.

3. Does Aggregate Demand and Aggregate Supply always occur at full-employment level?

a) If yes, will there be some unemployment? Explain

b) If no, then the actual real GDP may be different from the potential real GDP. When the actual and potential GDP are not the same, then the economy is either in a recessionary gap or inflationary gap. Explain

1. Discuss the difference between an increase in the aggregate demand curve and an increase in the quantity of real GDP demanded. Include a discussion of how the price level relates to each event.

2. What are the major factors that determine investment, and what impact does each have on aggregate demand?

3. Describe the difference between a microeconomic demand curve and an aggregate demand curve.

4. The aggregate demand curve portrays the relationship between the price level and real GDP. What are the three reasons this relationship is a negative or inverse relationship? Provide brief illustrations of each.

5. What role do imports play in aggregate demand? Under which conditions will changes in imports expand aggregate demand? Reduce aggregate demand?

6. Shifts in the Aggregate Supply Curves

List and discuss the things that will make the Short Run Aggregate Supply curve shift to the left or to the right. Illustrate.

List and discuss the things that will make the Long Run Aggregate Supply curve shift to the left or to the right. Illustrate.

7. What is the natural level of output?