1. Short-Run Macroeconomic Situations Chapter 7

2. Do You Know …  the different short-run situations in an economy?  what happens in those situations?  what cause the economy to be in one of those situations?

3. I. Short-Run Macroeconomic Situations At any point in time in the short run, an economy is in one of the following four situations:  Stagflation  Expansion  Prosperity  Recession

4. Original Situation P Q = Y ($) Originally, in an economy with AD 0, AS SR0 and AS LR, the economy is at long-run equilibrium point E 0, where the equilibrium price level is P 0, and the equilibrium real GDP is Q f = Y f, the economy’s potential output. AS SR0 AD 0 QfQf P0P0 The AS LR and a horizontal line from P 0, both going through E 0, divide the diagram into four different areas, I, II, II, and IV, clockwise. III IIIIV AS LR E0E0

5. II. What Happens in the Situations? What Are the Causes? Short-Run Situation Real GDP Unemployment Price Level Q = Y ($) U P Stagflationdownup Expansionupdownup Prosperityupdown Recessiondownupdown Cause AS AD AS AD

6. III. What Causes the Situations?  A decrease in AS SR leads to stagflation  An increase AD leads to expansion  An increase in AS SR leads to prosperity  A decrease in AD leads to recession

7. Summary Graphs P Q = Y ($) E0E0 AS SR0 AD 0 Q0Q0 P0P0 III IIIIV P up & Q downP up & Q up P down & Q upP down & Q down Area IAS SR => P QArea IIAD=> P QArea IIIAS SR => P QArea IVAD=> P Q StagflationExpansion ProsperityRecession