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New Way to Depict Long Run Growth and Inflation A. Read 715 and follow Fig. 31-5

New Way to Depict Long Run Growth and Inflation A. Read 715 and follow Fig. 31-5 ….top pg. 716……but our purpose is to provide a framework for short run analysis. As we develop the short run model, we keep it simple by not showing the continuing growth and inflation depicted in fig 31-5.

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New Way to Depict Long Run Growth and Inflation A. Read 715 and follow Fig. 31-5

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  1. New Way to Depict Long Run Growth and Inflation • A. Read 715 and follow Fig. 31-5 • ….top pg. 716……but our purpose is to provide a framework for short run analysis. • As we develop the short run model, we keep it simple by not showing the continuing growth and inflation depicted in fig 31-5. • But always remember that long run trends provide the background for short run fluctuations. • Short run fluctuations in output and the price level should be viewed as deviations from the continuing long run trends.

  2. Why the AS Slopes Up in Short Run • Three theories but all have a common theme: • the Q of output supplied deviates from its long run or natural level when the price level deviates from the price level that people expected. • When the price level rises above the expected level, output rises above its natural rate • When the price level falls below the expected level, output falls below its natural rate. • **Eventually, as people adjust their expectations, misperceptions are corrected, nominal wages adjust and prices adjust

  3. Why Short Run Agg Supply shifts (see table 31-2 p. 720) • Same reasons as LRAS shifts • But includes change in Price Level – be sure to read 719 (the key is how it is tied in with wages)

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