12 SHORTRUN ECONOMIC FLUCTUATIONS Aggregate Demand Aggregate Supply

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12 SHORT-RUN ECONOMIC FLUCTUATIONS

12 SHORT-RUN ECONOMIC FLUCTUATIONS

Aggregate Demand Aggregate Supply Copyright © 2006 Thomson Learning 33

Aggregate Demand Aggregate Supply Copyright © 2006 Thomson Learning 33

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 1 A Look At Short-Run Economic Fluctuations Copyright © 2004 South-Western

Figure 2 Aggregate Demand Aggregate Supply. . . Price Level Aggregate supply Equilibrium price

Figure 2 Aggregate Demand Aggregate Supply. . . Price Level Aggregate supply Equilibrium price level Aggregate demand 0 Equilibrium output Quantity of Output Copyright © 2004 South-Western

Figure 3 The Aggregate Demand Curve. . . Price Level P P 2 1.

Figure 3 The Aggregate Demand Curve. . . Price Level P P 2 1. A decrease in the price level. . . 0 Aggregate demand Y Y 2 Quantity of Output 2. . increases the quantity of goods and services demanded. Copyright © 2004 South-Western

Figure 4 The Long-Run Aggregate Supply Curve Price Level Long-run aggregate supply P P

Figure 4 The Long-Run Aggregate Supply Curve Price Level Long-run aggregate supply P P 2 2. . does not affect the quantity of goods and services supplied in the long run. 1. A change in the price level. . . 0 Natural rate of output Quantity of Output Copyright © 2004 South-Western

Figure 5 Long-Run Growth and Inflation 2. . and growth in the money supply

Figure 5 Long-Run Growth and Inflation 2. . and growth in the money supply shifts aggregate demand. . . Long-run aggregate supply, LRAS 1980 LRAS 1990 LRAS 2000 Price Level 1. In the long run, technological progress shifts long-run aggregate supply. . . P 2000 4. . and ongoing inflation. P 1990 Aggregate Demand, AD 2000 P 1980 AD 1990 AD 1980 0 Y 1980 Y 1990 Quantity of Output 3. . leading to growth in output. . . Y 2000 Copyright © 2004 South-Western

Figure 6 The Short-Run Aggregate Supply Curve Price Level Short-run aggregate supply P P

Figure 6 The Short-Run Aggregate Supply Curve Price Level Short-run aggregate supply P P 2 2. . reduces the quantity of goods and services supplied in the short run. 1. A decrease in the price level. . . 0 Y 2 Y Quantity of Output Copyright © 2004 South-Western

Figure 7 The Long-Run Equilibrium Price Level Long-run aggregate supply Short-run aggregate supply A

Figure 7 The Long-Run Equilibrium Price Level Long-run aggregate supply Short-run aggregate supply A Equilibrium price Aggregate demand 0 Natural rate of output Quantity of Output Copyright © 2004 South-Western

Figure 8 A Contraction in Aggregate Demand 2. . causes output to fall in

Figure 8 A Contraction in Aggregate Demand 2. . causes output to fall in the short run. . . Price Level Long-run aggregate supply Short-run aggregate supply, AS AS 2 3. . but over time, the short-run aggregate supply curve shifts. . . A P B P 2 P 3 1. A decrease in aggregate demand. . . C Aggregate demand, AD AD 2 0 Y 2 Y 4. . and output returns to its natural rate. Quantity of Output Copyright © 2004 South-Western

Figure 10 An Adverse Shift in Aggregate Supply 1. An adverse shift in the

Figure 10 An Adverse Shift in Aggregate Supply 1. An adverse shift in the shortrun aggregate supply curve. . . Price Level Long-run aggregate supply AS 2 Short-run aggregate supply, AS B P 2 A P 3. . and the price level to rise. Aggregate demand 0 Y 2 2. . causes output to fall. . . Y Quantity of Output Copyright © 2004 South-Western

Figure 11 Accommodating an Adverse Shift in Aggregate Supply 1. When short-run aggregate supply

Figure 11 Accommodating an Adverse Shift in Aggregate Supply 1. When short-run aggregate supply falls. . . Price Level Long-run aggregate supply P 3 C P 2 3. . which P causes the price level to rise further. . . 0 A 4. . but keeps output at its natural rate. Natural rate of output Short-run aggregate supply, AS AS 2 2. . policymakers can accommodate the shift by expanding aggregate demand. . . AD 2 Aggregate demand, AD Quantity of Output Copyright © 2004 South-Western