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Macroeconomics 12th Edition by Rudiger Dornbusch, Stanley Fischer ,Richard Startz
Edition 12ISBN: 978-1259070969Macroeconomics 12th Edition by Rudiger Dornbusch, Stanley Fischer ,Richard Startz
Edition 12ISBN: 978-1259070969 Exercise 1
Using the aggregate supply-aggregate demand model, explain how output and prices are determined. Will output vary or stay fixed in the long run Suppose the aggregate demand curve were to remain fixed: What can we infer about the behavior of prices over time
Explanation
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The aggregate demand is the sum of consumption, investment, government expenditure, and net exports. The curve of aggregate demand represents the output at each price level where goods and money market are in equilibrium.
The aggregate supply is the total amount of output that an economy can produce at given price and resources. The curve of aggregate supply curve represents the output firms willing to sell at each price level.
Using the AD-AS model, the output and price are determined by the intersection of AS and AD curves. However, the shape of the curves is different in different the time frame. This is because the shape of the aggregate supply curve is horizontal in the short-run and vertical in the long-run.
In the short-run, the AS curve is horizontal and AD curve is downward sloping. The output is determined by the aggregate demand whereas the price remains fixed. Therefore, the price level is fixed where the aggregate supply hits the vertical axis and output level can change.
In the long-run, the AS curve is vertical and AD curve is downward sloping. The output is determined by the aggregate supply curve and the price is determined by the aggregate demand. Therefore, the output is fixed where the aggregate supply hits the horizontal axis and price can change.
In the medium run, the aggregate supply curve is upward sloping, and the aggregate demand curve is downward sloping. The intersection of both curves after fluctuations determine the output and price level.
In the long run, when the AS curve shifts to rightward, there will be an increase in the potential output. Thus, the output can vary in the long-run.
Suppose the aggregate demand curve is fixed but the aggregate supply curve can change. In such a case, with the change in the supply, the price level will change. For instance, an increase in the supply will reduce the price level. Therefore, the price level change over time keeping aggregate demand fix.
The aggregate supply is the total amount of output that an economy can produce at given price and resources. The curve of aggregate supply curve represents the output firms willing to sell at each price level.
Using the AD-AS model, the output and price are determined by the intersection of AS and AD curves. However, the shape of the curves is different in different the time frame. This is because the shape of the aggregate supply curve is horizontal in the short-run and vertical in the long-run.
In the short-run, the AS curve is horizontal and AD curve is downward sloping. The output is determined by the aggregate demand whereas the price remains fixed. Therefore, the price level is fixed where the aggregate supply hits the vertical axis and output level can change.
In the long-run, the AS curve is vertical and AD curve is downward sloping. The output is determined by the aggregate supply curve and the price is determined by the aggregate demand. Therefore, the output is fixed where the aggregate supply hits the horizontal axis and price can change.
In the medium run, the aggregate supply curve is upward sloping, and the aggregate demand curve is downward sloping. The intersection of both curves after fluctuations determine the output and price level.
In the long run, when the AS curve shifts to rightward, there will be an increase in the potential output. Thus, the output can vary in the long-run.
Suppose the aggregate demand curve is fixed but the aggregate supply curve can change. In such a case, with the change in the supply, the price level will change. For instance, an increase in the supply will reduce the price level. Therefore, the price level change over time keeping aggregate demand fix.
Macroeconomics 12th Edition by Rudiger Dornbusch, Stanley Fischer ,Richard Startz
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