FINAL GOODS and SERVICES produced in an economy, expressed as the TOTAL AMOUNT OF MONEY EXCHANGED for those goods and services. Since it is measured by MARKET VALUES, it only represents total output at a given price level and does not necessarily represent QUALITY or STANDARD OF LIVING. AGGREGATE SUPPLY
Is the TOTAL SUPPLY OF GOODS and
SERVICES an economy produces in a given period of time. It’s the amount of goods companies plan to sell at a time period. Aggregate supply is the relationship between PRICE LEVELS and the AMOUNT OF GOODS and SERVICES. Short-run economic fluctuations In the short run, OUTPUT is determined by both the AGGREGATE SUPPLY and AGGREGATE DEMAND within an economy. Anything that causes labor, capital, or efficiency to go up or down results in fluctuations in economic output. Economic activity fluctuates from year to year. in some years, normal growth does not occur, indicating a recession. Short-run economic fluctuations NORMAL GROWTH of a country is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. it is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. RECESSION is a period of declining real income and rising unemployment. DEPRESSION is a severe recession. Three key facts about short- run economic fluctuations ECONOMIC FLUCTUATIONS are IRREGULAR and UNPREDICTABLE. • Fluctuations in the economy are often called the “BUSINESS CYCLE” and are IMPOSSIBLE to predict accurately. Most macroeconomic variables FLUCTUATE TOGETHER. • Real GDP measures short term changes in the economy. most variables fluctuate together, and they fluctuate in different amounts. As output falls, UNEMPLOYMENT RISE. Changes in real GDP are INVERSELY related to CHANGES in UNEMPLOYMENT RATE. Meaning, during when an economic falls, unemployment rises. The economy in the long-run It is not a set period of time but rather the TIME HORIZON needed for a producer to have flexibility over all production decisions. The long run is a period of time in which all factors of PRODUCTION and COSTS are VARIABLE. The long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy. In the long run, the company can adjust all cost. The economy in the short-run
The short run is the time horizon over which
factors of production are FIXED, EXCEPT FOR LABOR, which REMAINS VARIABLE. It is a length of time which fixed condition cannot be altered and certain decisions cannot be changed to increase production. How to use the model of AD and AS to explain economic fluctuations ■ Economist use the model of aggregate demand and aggregate supply to explain short-run fluctuations in economic activity around its long-run trend. ■ The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level. ■ The aggregate-supply curve shows the quantity of goods and services that firms choose to produce and sell at each price level How shifts in either AD or AS can cause recession Causes of Recessions A financial crisis. ■ A rise in interest rates ■ Fall in asset prices ■ Appreciation in exchange rate ■ Fiscal austerity Recessions can also be caused by ■ Supply-side shock, e.g. rise in oil prices cause inflation and lower spending power. Higher oil prices would increase the cost of production and causes the short-run aggregate supply curve to shift to the left. How shifts in either AD and AS can cause booms Causes of Booms ■ Lower interest rates ■ Increased wages ■ Increased government spending ■ Devaluation. ■ Confidence ■ Lower tax ■ Rising house prices. ■ Financial stability. Shifts in Aggregate Demand Shifts in Aggregate Supply