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Chapter 7

Chapter 7. Aggregate Demand and Aggregate Supply. Aggregate Supply (AS) Curve. In our last class we saw that Aggregate Demand (AD) curve is a relationship between Price level and Real GDP (RGDP) This relationship is negative because of three effects: Wealth Effects Interest Rate Effects

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Chapter 7

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  1. Chapter 7 Aggregate Demand and Aggregate Supply Hossain: MSMC

  2. Aggregate Supply (AS) Curve • In our last class we saw that Aggregate Demand (AD) curve is a relationship between • Price level and • Real GDP (RGDP) • This relationship is negative because of three effects: • Wealth Effects • Interest Rate Effects • International Trade Effects

  3. Aggregate Supply (AS) Curve • This negative relationship means, • When Price level rises, RGDP falls and • When Price level falls, RGDP rises • This negative relationship generates a downward sloping AD curve.

  4. Aggregate Supply (AS) Curve • Aggregate Supply (AS) is a relationship between: • Price level and • RGDP produced at each price level

  5. Short and Long Run The Short Run • A time period in which wages and some other prices are sticky (slow to adjust) • They do not respond to changes in economic conditions • In a short run equilibrium, market does not clear

  6. Short and Long Run Sticky Price • Price that is slow to adjust to its equilibrium level • Creating sustained periods of shortage or surplus • Stickiness of price determines the length of the short run

  7. Short and Long Run The Long Run • The long run in macroeconomic analysis, is a period in which wages and prices are flexible. • Here, price level acts as an adjustment mechanism that restores the equilibrium • In equilibrium,

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