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macro Introduction to
Economic Fluctuations
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides
by Ron Cronovich
15
Average growth
quarter, at annual rate
rate = 3.4%
10
-5
-10
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
An increase in
the money
supply shifts
the AD curve
to the right.
AD2
AD1
Y
Y F (K , L )
Y is the full-employment or natural level of
output, the level of output at which the
economy’s resources are fully employed.
“Full employment” means that
unemployment equals its natural rate.
CHAPTER 9 Introduction to Economic Fluctuations slide 13
Aggregate Supply in the Long Run
Recall from chapter 3:
In the long run, output is determined by
factor supplies and technology
Y F (K , L )
Full-employment output does not depend on
the price level,
so the long run aggregate supply (LRAS)
curve is vertical:
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
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 19
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
This adjustment of prices is what moves
the economy to its long-run equilibrium.
CHAPTER 9 Introduction to Economic Fluctuations slide 20
The SR & LR effects of M > 0
A = initial P LRAS
equilibrium
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%
As economy 30%
10%
was recovering, 8%
oil prices shot up 20%
another huge 0% 4%
supply shock!!! 1977 1978 1979 1980 1981
1980s: 30%
8%
A favorable 20%
10%
supply shock-- 0%
6%
P1 A SRAS1
AD1
Y
Y2 Y