12-4 lecture notes

12-4 lecture notes - In our economy, overproduction cannot...


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As prices go down, aggregate demand expands Aggregate demand is composed of consumption, investment, government spending, and net exports Aggregate supply is vertical which means that output is fixed and any change in price will not affect the output level, this occurs at full employment (classical scenario, long run) Another scenario is the aggregate supply curve is horizontal which means output can increase without increasing prices and depends on massive unemployment (Keynesian scenario, short run) Last possible scenario is when the aggregate supply is up sloping, this is when there is not full employment nor massive unemployment (short run) If aggregate demand shifts to the right, the short run aggregate supply is able to go up the SRAS curve and prices are higher, but this is not sustainable As the cost of production rises, the SRAS shifts to the left and the equilibrium goes back to full employment with higher prices
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Unformatted text preview: In our economy, overproduction cannot be maintained because it will lead to recession, this is the classical model of thinking (conservatives) For this to be assumed wages and prices must be adjustable Also the by definition, there is no way to project how long it takes to get to full employment In the real world, prices and wages are not completely flexible, just to a certain extent, because of minimum wages, unions, and manual costsalso, we dont have the patience to wait for full employment If SRAS moves left, there is stagnant inflation, and to adjust you must increase AD, which will lead to full employment but also higher inflation The Phillips curve shows that where unemployment is high, wages go down, but when unemployment is low, wages are much higher, which therefore shows that lower unemployment leads to higher inflation and vice versa...
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