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Chapter 28

Chapter 28. Caroline Martin-Tumasz Don Li. Slope of Aggregate Supply. Related to output Upward sloping A: Horizontal Range Low output Low utilization B: Middle Range Medium output Medium utilization C: Vertical Range High output High utilization. C. PL. B. A. EGDP.

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Chapter 28

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  1. Chapter 28 Caroline Martin-Tumasz Don Li

  2. Slope of Aggregate Supply • Related to output • Upward sloping • A: Horizontal Range • Low output • Low utilization • B: Middle Range • Medium output • Medium utilization • C: Vertical Range • High output • High utilization C PL B A EGDP

  3. Intersection of AS and AD AD • Determines equilibrium price level and equilibrium GDP AS PL EGDP

  4. Self-Correcting Mechanism • Recessionary Gap: • PGDP > EGDP • Unemployed would be unemployed for so long, they would be willing to accept lower wages • Lower wages decreases costs of production • Profitability increases • Production increases • AS shifts rights until it intersects AD at PGDP • Price levels come down, EGDP goes up • Doesn’t really work

  5. AD AS0 PL AS1 Recessionary Gap PLE EGDP PGDP RGDP

  6. Self-Correcting Mechanism cont. • Inflationary Gap • PGDP < EGDP • Due to high production, resources would become scare • Prices of resources rise, increase costs of production • AS falls, shifts left until it intersects with AD at PGDP • EGDP falls, price levels rise

  7. AS1 AD AS0 PL Inflationary Gap PLE PGDP EGDP RGDP

  8. Full Employment • When AS and AD intersect at PGDP AD AS PL PGDP EGDP

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