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Chapter 8
Chapter 8
CHAPTER NINE
macro Introduction
Introduction to
Economic
to
Economic Fluctuations
Fluctuations
(chapter 9)
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides
by Ron Cronovich
-2
-4
1960 1965 1970 1975 1980 1985 1990 1995 2000
P
P = (M V) / Y
An increase in Rise in M
the money
supply shifts
the AD curve
to the right.
AD2
AD1
Y
Y F (K , L )
Y F (K , L )
P LRAS
Y
Y
P LRAS
An increase
in M shifts
the AD curve
to the right.
In the long run, P2
this increases
the price level… P1 AD2
AD1
…but leaves Y
output the same.
Y
P
The SRAS curve
is horizontal:
The price level
is fixed at a
predetermined SRAS
P
level, and firms
sell as much as
buyers demand.
Y
Consider example of catalogue company: publishes price,
and takes orders for quantity
CHAPTER 9 Introduction to Economic Fluctuations slide 17
Short-run effects of an increase in M
P
In the short run
when prices are …an increase
sticky,… in aggregate
demand…
SRAS
P
AD2
AD1
Y
…causes output Y1 Y2
to rise.
CHAPTER 9 Introduction to Economic Fluctuations slide 18
From the short run to the long run
Over time, prices gradually become “unstuck.”
When they do, will they rise or fall?
In the short-run then over time,
equilibrium, if the price level will
Y Y rise
Y Y fall
Y Y remain constant
B = new short-
run eq’m P2 C
after Fed
B SRAS
increases M P A AD2
AD1
C = long-run
equilibrium Y
Y Y2
50%
12%
Late 1970s: 40%
10%
As economy 30%
was recovering, 8%
20%
oil prices shot up
again, causing 10%
6%
another huge 0% 4%
supply shock!!! 1977 1978 1979 1980 1981
1980s: 30%
20% 8%
A favorable
10%
supply shock-- 0%
6%
Y
Y2 Y