1 / 7

Aggregate Demand and Aggregate Supply

Aggregate Demand and Aggregate Supply. Comparison of Short Run and Long Run Equilibrium Points. Learning Objectives. Understand the difference between short-run equilibrium and long-run equilibrium

joelle
Download Presentation

Aggregate Demand and Aggregate Supply

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Aggregate Demand and Aggregate Supply Comparison of Short Run and Long Run Equilibrium Points

  2. Learning Objectives • Understand the difference between short-run equilibrium and long-run equilibrium • Understand the difference between transmission mechanisms that re-equilibrate the economy in the short-run and in the long-run.

  3. The Short Run and the Long Run LRAS P r LM(P2) LM(P1) S P2 S r1 P1 r2 L L IS AD 0 Y* Y 0 Y Y* Y

  4. Short Run and Long Run: • The difference between the short-run approach and the long-run approach is the assumptions made about P and Y. • In the short-run we assume that prices are sticky; ie., they do not adjust quickly to changes in the economy. • This means that r and Y must adjust to bring the model back to equilibrium.

  5. Short Run and Long Run: • Short-run assumptions are reflected in point S. • Prices do not adjust so Y can be less than full employment Y, even while there is equilibrium in both markets. • The policy implication is that government intervention is required to reach full employment.

  6. Short Run and Long Run: • The difference between the short-run approach and the long-run approach is the assumptions made about P and Y. • In the long-run we assume that prices are flexible; ie., they adjust to changes in the economy. • This means that P must adjust to bring the model back to equilibrium.

  7. Short Run and Long Run: • Long-run assumptions are reflected in point L. • Prices change so the economy self-adjusts back to full employment Y. • The policy implication is that no government intervention is required to reach full employment.

More Related