Aggregate Supply and Aggregate Demand
We're throwing AD and AS together on one graph, diving into equilibrium, output gaps, and how the self-correcting mechanism handles demand and supply shocks!!
Alright!!~ Jumpin’ right iiin!!!
We learned AD and AS!~~!~! (aggregate demand - aggregate supply) so let’s lump the two together and draw them,
and then we’ll look at Equilibrium!!~
Doooone~~~~~
(The equilibrium of the aggregate demand curve and short-run aggregate supply curve will always exist!!)
(It can’t not exist. Because the signs of the slopes of the two curves are different!))
But wait! There was a fact that was super emphasized in the previous posting ( http://gdpresent.blog.me/220407267918 )
AS curve (aggregate supply curve) [ Money and Banking that I studied #10 ]
Has everyone taken macroeconomics? I’m taking macroeconomics next semester,… but, T_T in my freshman year of college ‘Understanding Economics…
gdpresent.blog.me
If the aggregate supply of the long-run aggregate supply curve
and the equilibrium output
are not equal to each other, the curve moves!
What does??? The short-run aggregate supply curve has no choice but to move/
Because it isn’t 0!!!!!
An output gap arises and the inflation rate goes up, and accordingly the expected inflation rate rises and the short-run aggregate supply curve moves
Until it becomes = 0!!
Then we can divide it into two situations.
The case where
and the case where
!!!!!
(
The case is static so it’s boring, so excluded! hehehehe)
Jus’ attaching the pics should be aight? hehe
Like this, in whatever situation, our economy works so that it returns to the potential output level,
and this is called the “self-correcting mechanism”!
Okay, from now on the story is different!!
Let’s think like this!
Suppose some country, having weathered every storm~~~, reaches General Equilibrium!!
Like sooo!!!!!
Now from here
we’ll look at cases where AS, AD, or LRAS (long run aggregate supply) moves due to various variables!
Negative demand shock,
positive demand shock,
temporary (negative) supply shock,
permanent (negative) supply shock
Let’s look at these 4 situations
In those situations, on the graph it looks like this
Soooo~~~ easyyy
It can all be explained with what we did~~~ before~
If the aggregate supply of the long-run aggregate supply curve
and the equilibrium output
are not equal to each other, the curve moves!!
What does??? The short-run aggregate supply curve has no choice but to move!!!!!!
Because it isn’t 0!!!!!
An output gap arises and the inflation rate goes up, and accordingly the expected inflation rate rises and the short-run aggregate supply curve moves
Until = 0!!
Everything is explained with this lolololololololololol
When sud!denly a negative demand shock happens!!
When a sud!den negative demand shock happens like this!!
There will be many factors that cause a negative demand shock to happen.
,
,
,
,
etc etc etc etc because of those! (We did this here http://gdpresent.blog.me/220407190864 )
MP curve (monetary policy curve), AD curve (aggregate demand curve) [ I …
This time let’s study “the effect on aggregate demand due to monetary policy.” (The reason?? Because aggregate demand is clearly… by monetary policy…
gdpresent.blog.me
Then
If the aggregate supply of the long-run aggregate supply curve
and the short-run equilibrium output
are not equal to each other, the curve moves.
Because it isn’t 0!
Until = 0!!
When a positive demand shock sud!!denly happens
When the demand curve suddenly moves like this!!!
(Cause is same as above)
Then
If the aggregate supply of the long-run aggregate supply curve
and the short-run equilibrium output
are not equal to each other, the curve moves.
Because it isn’t 0!
Until = 0!!
When a sud!!den temporary (negative) supply shock happens
There seem to be many causes that make it move like this!!!
Like a rise in crude oil prices, or maybe something like a natural disaster?!?!!
Since this kind of temporary supply shock doesn’t change the economy’s production capacity, LRAS will stay just as it is!!!
Then
If the aggregate supply of the long-run aggregate supply curve
and the short-run equilibrium output
are not equal to each other, the curve moves.
Because it isn’t 0!
Until = 0!!
When a sud!!!den permanent negative supply shock happens!?
What’s a case like this??! It would be a case where the economy’s production capacity falls….well….
Like being reduced to ruins by war? Or some regulation being strengthened politically?? About that? hehehe
Well in this case on the graph
Well in this case LRAS would move like this
Then
If the aggregate supply of the long-run aggregate supply curve
and the short-run equilibrium output
are not equal to each other, the curve moves.
Because it isn’t 0!
Until = 0!!
Okay, that’s it for this posting.
As for the next posting,
apparently it’ll cover “how to respond” in situations like those hehe
Originally written in Korean on my Naver blog (2015-07). Translated to English for gdpark.blog.