Aggregate Demand and Aggregate Supply

Aggregate Demand and Aggregate Supply

1. Three key facts about economic flutuations

   • 1. Economic fluctuations are irregular and unpredictable
   • 2. Most macroeconomics quantities fluctuate together
   • 3. As output falls, unemployment rises
   • the assumption of classical economics: the classical dichotomy, the neutrality of money

2. The aggregate-demand curve

   • the AD curve show the quantity of all goods and services demanded in the economy at any given price level
   • Reasons for the AD curve slopes downward: the wealth effect (P and C), the interest-rate effect P and I), the exchange-rate effect (P and NX)
   • Reasons for the AD curve might shift: Changes in C, Change in I, Change in G, Change in NX

3. The aggregate-supply curve

   • The AS curve shows the total quantity of goods and services firms produce and sell at any give price level
   • Reasons for the LRAS curve might shift: changes in L or natural rate of unemployment, change in K or H, changes in natural resources, changes in technology
   • Reasons for the AS curve upward sloping: this positive relationships could be due to: sticky wages, sticky prices, misperceptions; overtime, wages, prices, and perceptions adjust, so this positive relationship is only temporary (short run)
   • The sticky - wage theory:

4. Explaining short-run economic flutuations