AGGREGATE SUPPLY

MR. CLIFFORD-HEAVY DAY This is a Mr. Clifford-heavy day! Since Mr. Clifford is dabomb.com, we shall give him due reverence with patience and note-taking awesomeness

CLASSICAL ECONOMIC THEORY Laissez-faire economics Free markets, in the short term, will automatically provide full employment as long as workers are flexible with their wage demands

JOHN MAYNARD KEYNES British economist – Disagreed with classical economic theory Believed that aggregate demand determined the overall level of economic activity and inadequate levels of aggregate demand would lead to long periods of high unemployment State intervention was necessary to moderate “boom and bust” economic trends His economic theories were adopted by many leading nations after WWII

KEYNESIAN ECONOMICS Gave more fiscal power to the federal government to regulate the economy Expansionary fiscal policy = decrease taxes and/or increase spending (during a recession) Contractionary fiscal policy = increase taxes and/or decrease spending (during inflation)

MR. CLIFFORD Mr. Clifford 3-1

AGGREGATE SUPPLY Definition = a schedule or curve that shows the total output in an economy at each price level Quantity of output (real GDP) produced at each price level Has a direct relationship between price level and output So the graph slopes…

UP! AS = P + I + G P roductivity I nput Costs G overnment Short run curve >>

3 RANGES OF AGGREGATE SUPPLY Horizontal = economy in a recession or depression Levels of output are less than the full employment output Vertical Full capacity economy Intermediate Both output and price levels can rise, does not have full employment

IT CAN SHIFT P roductivity (technology) I nput prices L aws, regulations and taxes E xpected inflation

INCREASE VS. DECREASE SRAS = short run aggregate supply

INCREASE VS. DECREASE LRAS = long run aggregate supply 3-5% unemployment (called full employment) Woah! Weird! >> It shifts by changes in: Technology Labor Productivity Capital

MACROECONOMIC EQUILIBRIUM Middle point between SRAS and AD determines the price level and the current output (GDP)

MR. CLIFFORD (AGAIN!) Mr. Clifford 3-3

INFLATIONARY GAP The equilibrium occurs to the right of full employment ( LRAS ) It goes to the right because it’s moving at a faster pace than the LRAS

RECESSIONARY GAP The equilibrium occurs to the left of full employment

THE PHILLIPS CURVE Mr. Clifford 3-4