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The relationship between unemployment and inflation in the long run
The relationship between unemployment and inflation in the long run
The relationship between unemployment and inflation in the long run
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Topic 12: Aggregate Demand and Aggregate Supply
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1. Introduction
2. Three Key Facts about Economic Fluctuations
2.1 Fact 1: Economics Fluctuations are Irregular and Unpredictable
2.2 Fact 2: Most Macroeconomic Quantities Fluctuate Together
2.3 Fact 3: As Output Falls, Unemployment Rises
3. Explaining Short-Run Economic Fluctuations
3.1 How the Short Run Differs from the Long Run
3.2 The Basic Model of Economic Fluctuations
4. The Aggregate Demand Curve
4.1 Why the Aggregate Demand Curve Slopes Downwards
4.2 Why the Aggregate Demand Curve May Shift
5. The Aggregate Supply Curve
5.1 Why the Aggregate Supply Curve is Vertical in the Long Run
5.2 Why the Aggregate Supply Curve May Shift
5.3 A New Way to Depict Long Run Growth and Inflation
5.4 Why the Aggregate Supply Curve Slopes Upward in the Short Run
5.5 Why the Short Run Aggregate Supply Curve May Shift
6. Two Causes of Economic Fluctuations
6.1 The Effects of a Shift in Aggregate Demand
6.2 The Effects of a Shift in Aggregate Supply
7. Summary
2. Three Key Facts about Economic Fluctuations
Economic activity fluctuates from year to year.
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In most years production of goods and services rises. On average over the past 50 years, production in the U.S. economy has grown by about 3 percent per year. In some years normal growth does not occur, causing a recession.
- A recession is a period of declining real GDP, falling incomes, and rising unemployment.
- A depression is a severe recession.
2.1 Fact 1: Economic Fluctuations are Irregular and Unpredictable
- Economic fluctuations are irregular and unpredictable.
- Fluctuations in the economy are often called the business cycle.
2.2 Fact 2: Most macroeconomic variables fluctuate together
· Most macroeconomic variables that measure some type of income or production fluctuate closely together.
· Although many macroeconomic variables fluctuate together, they fluctuate by different amounts.
2.3 Fact 3: As output falls, unemployment rises
- Changes in real GDP are inversely related to changes in the unemployment rate.
- During times of recession, unemployment rises substantially.
3. Explaining Short Run Economic Fluctuations
- Most economists believe that classical theory describes the world in the long run but not in the short run.
3.1 How the Short Run Differs from the Long Run
- Changes in the money supply affect nominal variables but not real variables in the long run.
- The assumption of monetary neutrality is not appropriate when studying year-to-year changes in the economy.
3.2 The Basic Model of Economic Fluctuations
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Two variables are used to develop a model to analyze the short-run fluctuations: - The economy’s output of goods and services measured by real GDP.
In conclusion, regardless of Macropoland’s current economic condition, it is fair to say that it is all part of the business cycle. The business cycle has three parts: peak, trough, and peak. The peak is the date that the recession starts. In Macropoland’s case, the peak would be at the beginning of 1973, its trough somewhere between 1973 and 1974, and then its peak again at 1974. In the second scenario, Macropoland is either at its trough, where it is about to head up again because of its low inflation rate, or it is at its expansion, on its way to heading to its next peak.
The economic business cycle of the world is its own living and breathing entity expanding and contracting with imprecise balances involving supply and demand. The expansions and contractions also known as booms and recessions support a delicate equilibrium of checks and balances, employment and unemployment. The year 1929 marked the beginning of the downward spiral of this delicate economic balance known as The Great Depression of the United States of America. The Great Depression is by far the most significant economic event that occurred during the twentieth century making other depressions pale in comparison. As a result, it placed the world’s political and economic systems into a complete loss of credibility. What transforms an ordinary recession or business cycle into an authentic depression is a matter of dispute, which caused trepidation among economic theorists. Some claim the depression was the result of an extraordinary succession of errors in monetary procedure. Historians stress structural factors such as massive bank failures and the stock market crash; economists hold responsible monetary factors such as the Federal Reserve’s actions when they contracted the currency distribution, and Britain's attempt to return their Gold Standard to pre-World War parities. Subsequently, there are the theorists such as the monetarists, who presume that it began as a normal recession, however many policy errors by the monetary establishment forced a reduction in the money supply, which worsened the economic condition, thereby turning the normal recession into the Great Depression. Others speculate that it was a failure of the free market or a failure of the government in their efforts to regulate interest rates, slow the occ...
We the consumer would rather pay less for any product that is needed or want. Ultimately we are the reason for high prices as well as low prices. Prices of products do not always stay the same and more popular products have higher prices than less popular products. These fluctuations, high prices and low prices are from the idea of supply and demand. Supply and demand defines the effect that the availability of a particular product and the desire or demand for that product has on price. Generally, if there is a low supply and a high demand, the price will be high (Investopedia). To understand the idea of supply and demand, the understanding of supply and the understanding of demand must be defined. The Law of Supply states that at higher prices, producers are willing to offer more products for sale than at lower prices, also that the supply increases as prices increase and decreases as prices decrease (Curriculum Link). The Law of Demand states people will buy more of a product at a lower price than at a higher price, if nothing changes, at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price and that at lower prices, people tend to buy some goods as a substitute for others more expensive (Curriculum Link). In todays economics these ideas are seen frequently in everyday life. The laws of supply and demand are seen in many ways in the company Apple Inc. Each year Apple Inc unveils a long awaited mobile operating system and IPhone. We can also see many aspects of the law of supply and demand in Nike Inc’s Jordan Brand. Jordan Brand has released a number of...
Supply and demand is defined as the relationship between the quantity that producers wish to sell at various prices and the quantity of a commodity that consumers wish to buy. In the functioning of an economy, supply and demand plays an important role in the economic decisions in which a company or individual may make.
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
A single firm or company is a producer, all the producers in the market form and industry, and the people places and consumers that an Industry plans to sell their goods is the market. So supply is simply the amount of goods producers, or an industry is willing to sell at a specific prices in a specific time. Subsequently there is a law of supply that reflects a direct relationship between price and quantity supplied. All else being equal the quantity supplied of an item increases as the price of that item increases. Supply curve represents the relationship between the price of the item and the quantity supplied. The Quantity supplied in a market is just the amount that firms are willing to produce and sell now.
One of the most important concepts of economics is supply and demand, which is the chief support of a market economy. The relationship between these two factors assists in outline the allocation of resources in the most effective way possible.
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,
The economy in the United States was recently experiencing what is now called the Great Recession which occurred from December of 2007 to June of 2009. During this recession we experienced a decrease in our gross domestic product and experienced an increase to our unemployment. Since 2003 the American economy has been seen inflation rates as low as .1% in 2008 and as high as 4.1% in 2007. Rates such as these detail the increase and decrease in prices of products throughout the economy and has a considerable influence on the supply and demand of goods from cars to bread. In the past ten years inflation rates have continually seen positive values w...