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Short-Run Macroeconomic Situations

Short-Run Macroeconomic Situations. Chapter 7. Do You Know …. the different short-run situations in an economy? what happens in those situations? what cause the economy to be in one of those situations?. I. Short-Run Macroeconomic Situations.

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Short-Run Macroeconomic Situations

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  1. Short-Run Macroeconomic Situations Chapter 7

  2. Do You Know … • the different short-run situations in an economy? • what happens in those situations? • what cause the economy to be in one of those situations?

  3. I. Short-Run Macroeconomic Situations At any point in time in the short run, an economy is in one of the following four situations: • Stagflation • Expansion • Prosperity • Recession

  4. Original Situation Originally, in an economy with AD0, ASSR0 and ASLR, the economy is at long-run equilibrium point E0, where the equilibrium price level is P0, and the equilibrium real GDP is Qf = Yf, the economy’s potential output. The ASLR and a horizontal line from P0 , both going through E0,divide the diagram into four different areas, I, II, II, and IV, clockwise. ASLR ASSR0 P I II E0 P0 IV III AD0 Qf Q = Y ($)

  5. II. What Happens in the Situations?What Are the Causes? Short-Run Situation Real GDP Unemployment PriceLevel Cause Q = Y ($) U P Stagflation down up up AS Expansion up down up AD Prosperity up down down AS Recession down up down AD

  6. III. What Causes the Situations? • A decrease in ASSR leads to stagflation • An increase AD leads to expansion • An increase in ASSR leads to prosperity • A decrease in AD leads to recession

  7. Summary Graphs Area IV Area III Area II Area I AD ASSR AD ASSR => => => => P P P P Q Q Q Q ASSR0 P Stagflation Expansion I II E0 P up & Q down P up & Q up P0 P down & Q down P down & Q up IV III Recession Prosperity AD0 Q0 Q = Y ($)

  8. See You! Take Care!

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