ECON 2006 Lecture Notes - Lecture 12: Price Level, Aggregate Supply, Aggregate Demand
Document Summary
If the price level drops, planned spending rises at all output levels (from the wealth and interest-rate effects). Increase in productivity: the sras curve shifts left because of a(n): Increase in nominal wages: decline in productivity. The ad-as model: the ad-as model uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations. If a demand or supply shock hits the economy, ad or sras shifts and moves the economy to a new short-run equilibrium. Gap recap: recessionary gap when aggregate output is below potential output. Inflationary gap when aggregate output is above potential output: output gap the % difference between actual aggregate output and potential output, output gap = [(actual aggregate output potential output) / potential output] x 100. Responding to supply shocks: negative supply shocks pose a policy dilemma, to stabilize aggregate output requires increasing aggregate demand. This will lead to inflation: but to stabilize prices requires reducing aggregate demand.
