Transcript Equilibrium - Granbury ISD

Equilibrium
• Equilibrium price and quantity are found
where the AD and AS curves intersect.
– At any price level above equilibrium sellers
are faced with surpluses and are forced to
reduce production and price level.
– At any price level below equilibrium buyers
are faced with shortages and are forced to
pay more, encouraging suppliers to produce
more.
Changes in Equilibrium
• Changes in AD have different effects on price
level and output depending on which range of
the AS curve the economy is in
– If price levels increase this is known as demand-pull
inflation
• Increases in AS have a positive effect on both
price level and output.
– When AS shifts right, price levels fall or stabilize, but
output increases.
• Decreases in AS have a negative effect on both
price level and output.
– When AS shifts left, price levels rise, and output
decreases (known as cost-push inflation or
stagflation).
Policy Responses to Recession
 Policymakers
may respond to a
recession (a decrease in aggregate
demand) in one of the following ways:
 Take
action to increase aggregate demand
by using monetary and fiscal policy
 Output
and employment rise, but so do price
levels.
 Do
nothing and wait for prices and wages
to adjust.
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
A Contraction in Aggregate Demand with
NO Government Response...
Price
Level
2. …causes output to
fall in the short run…
Long-run
aggregate
supply
Short-run aggregate
supply, AS1
AS
2
A
P1
P2
B
P3
1. A decrease in
aggregate demand…
C
AD
0
Y2
Y1
3. …but over time,
the short-run
aggregate-supply
curve shifts…
Aggregate
demand, AD1
2
4. …and output returns
to its natural rate.
Quantity of
Output
The Effects of an Adverse Shift in
Aggregate Supply: Stagflation
Adverse shifts in aggregate supply cause
stagflation—a combination of recession
and inflation.
Output falls and prices rise.
Policymakers who can influence
aggregate demand cannot offset both of
these adverse effects simultaneously.
Accommodating an Adverse Shift in
Aggregate Supply...
Price
Level
1. When short-run aggregate supply falls…
Long-run
aggregate AS
2
supply
P3
C
P2
A
Short-run
aggregate
supply, AS1
2. …Policymakers can
increase AD
P1
3....which
causes the
price level
to rise
4. …but keeps
output at its
natural rate.
0
AD2
Aggregate demand, AD1
Natural rate
of output
Quantity of
Output
THE INFLATION-UNEMPLOYMENT
RELATIONSHIP
• Normally, there is a short-run trade-off
between the rate of inflation and the rate
of unemployment
• Aggregate supply shocks though can
cause both higher rates of inflation and
higher rates of unemployment
• Regardless, over the long-run there is
no significant trade-off between
inflation and the rate of unemployment