chapter 8 -> output + prices in short run

^ in price level
∨ in price level

= ∨ real value of money held by private sector (decline in wealth = ∨ C = ∨NX = ∨ AE= ∨YE )
= ^ real value of money held by private sector (increase in wealth = ^ C = ^ NX = ^AE = ^YE)

graph 8 : Aggregate demand curve (AD)

-plots equilibirum level of GDP that corresponds to each possible price level

SLOPE : ∨ price level = ^GDP/Ye

-movement : ∆price levels or GDP causing shift for AE curve)

-shift : Δ any automous expenditures that shift AE curve SO ΔCGINX
>horizontal shift by multiplier (ΔAE / ∆Ye )
-> right for increase
<- left for decrease

Why is AD - sloped?

1. wealth effect : ∨ in price level = ^ wealth = ^ C = ^ GDP
2. Trade effect : ∨ in price level =^ NX = ^ GDP
3. i-rate effect : money, banking, I-rate... (later chapters)

graph 9 : Aggregate supply curve (AS)

-relates price level to quantity of total output of G/S that firms would like to produce and sell (given factor prices and state of technology )
->2 assumptions : factor prices + technology are constant

+ slope -> unit costs rise as output rises (considering LODR) : assumptions that firms unit costs rise when output rises

-shift : Δ factor prices + technology > aggregate supply shocks
-> increase in factor prices = AS shift ^
-> decrease in factor prices = AS shift down right

tmacro equilibrium value of real GDP occurs @

intersection of AS and AD curves
→ 2 conditions : desired AE = actual GDP and @ prevailing price level, firms must be willing to produce @ prevailing level of GDP

AD curve + AS curve shifts are called

aggregate demand/supply shock :
→ shift ^desired AE (positive shock (on GDP))
← shift ↓desired AE (negative shock (on GDP))

effect of any AD CURVE shift

is divided between ∆AD and ∆real GDP (steeper AS curve, the greater the price effect and smaller the GDP effect)

- flat range : ∆GDP but not price level : firms have excess capacity (so can ∆output w/o ∆unit costs) : ∆output = size of simple multiplier

- intermediate range : changes in both levels : multiplier is positive, but value is smaller than multiplier

- steep range : very little can be produced bc physical capacity constraints : any ∆AD will lead to sharp ∆price level without ∆GDP : multiplier = nearly 0

effects of AS shocks

price level and GDP to change in opposite directions
^ supply = price level ↓ = GDP ^ OR ↓supply = price ^ = GDP ↓

aggregate demand/supply shock

any event that causes the aggregate demand/supply curve to shift inward or outward

stagflation

when real GDP falls as price levels rise

simple multiplier for AD curve

∆AE / ∆Ye
-horizontal shift in AD due to ∆a (holding prices constant)