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Fig. 1 The Two-Way Relationship Between Output and the Price Level

Aggregate Demand Curve. Price. Real. Level. GDP. Aggregate Supply Curve. Fig. 1 The Two-Way Relationship Between Output and the Price Level. Fig. 2 Deriving the Aggregate Demand Curve. Price Level. K. 140. J. 100. AD. Real GDP ($ Trillions). 6. 10.

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Fig. 1 The Two-Way Relationship Between Output and the Price Level

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  1. Aggregate Demand Curve Price Real Level GDP Aggregate Supply Curve Fig. 1 The Two-Way Relationship Between Output and the Price Level

  2. Fig. 2 Deriving the Aggregate Demand Curve Price Level K 140 J 100 AD Real GDP ($ Trillions) 6 10

  3. Fig. 3 A Spending Shock Shifts the AD Curve Price Level 100 H E AD2 AD1 Real GDP ($ Trillions) 10 15

  4. Price level ↑ moves us leftward along the AD curve Price level ↓ moves us rightward along the AD curve Fig. 4a Effects of Key Changes on the Aggregate Demand Curve (a) Price Level P3 P1 P2 AD Real GDP Q3 Q1 Q2

  5. Entire AD curve shifts rightward if: • a, IP, G, orNXincreases • Net taxes decrease • The money supply increases Fig. 4b Effects of Key Changes on the Aggregate Demand Curve (b) Price Level AD2 AD1 Real GDP

  6. Entire AD curve shifts leftward if: • a, IP, G, orNXdecreases • Net taxes increase • The money supply decreases Fig. 4c Effects of Key Changes on the Aggregate Demand Curve (c) Price Level decreases AD1 AD2 Real GDP

  7. Starting at point A, an increase in output raises unit costs. Firms raise prices, and the overall price level rises. Starting at point A, a decrease in output lowers unit costs. Firms cut prices, and the overall price levelfalls. Fig. 5 The Aggregate Supply Curve Price Level AS 130 B 100 A 80 C Real GDP ($ Trillions) 6 10 13.5

  8. When unit costs rise at any given real GDP, the AS curve shifts upward–e.g., an increase in world oil prices or bad weather for farm production. Fig. 6 Shifts of the Aggregate Supply Curve AS2 Price Level AS1 L 140 100 A Real GDP ($ Trillions) 10

  9. Real GDP ↑ moves us rightward along the AS curve Real GDP ↓ moves us leftward along the AS curve Fig. 7a Effects of Key Changes on the Aggregate Supply Curve (a) Price Level AS P3 P1 P2 Real GDP Q2 Q1 Q3

  10. Entire AS curve shifts upward if unit costs ↑ for any reason besides an increase in real GDP Fig. 7b Effects of Key Changes on the Aggregate Supply Curve (b) AS2 Price Level AS1 Real GDP

  11. Entire AS curve shifts downward if unit costs ↓ for any reason besides an decrease in real GDP Fig. 7c Effects of Key Changes on the Aggregate Supply Curve (c) Price Level AS1 AS2 Real GDP

  12. Fig. 8 Short-Run Macroeconomic Equilibrium AS Price Level B 140 E 100 F AD Real GDP ($ Trillions) 6 10 14

  13. Fig. 9 The Effect of a Demand Shock AS Price Level 130 H 115 J 100 E AD2 AD1 Real GDP($ Trillions) 10 13.5 12.5

  14. Fig. 10 The Long-Run Adjustment Process Price Level AS2 AS1 P4 K J P3 P2 H P1 E AD2 AD1 YFE Y3 Y2 Real GDP

  15. Fig. 11 Long-Run Adjustment After Negative Demand Shock Price Level AS1 AS2 P1 E P2 N P3 M AD1 AD2 Real GDP Y2 YFE

  16. Fig. 12 The Long-Run Adjustment Process Long-Run AS Curve Price Level K E M AD2 AD1 AD3 Real GDP YFE

  17. Fig. 13 The Effect of Supply Shocks Long-Run AS Curve Price Level AS2 AS1 R AS3 P2 P1 E T P2 AD Real GDP Y2 YFE Y3

  18. 1. In 1990, a supply shock from higher oil prices shifted the AS curve leftward . . . Price Level 2. causing output to fall . . . 3. and the price level to rise. Real GDP Fig. 14a An AD and AS Analysis of Two Recessions (a) AS1991 AS1990 R P2 E P1 AD1990 Y2 YFE

  19. 4. In 2001, a demand shock from several factors caused the ADcurve to shift leftward . . . Price Level 5. causing output to fall . . . 6. and the price level to fall. Real GDP Fig. 14b An AD and AS Analysis of Two Recessions (b) AS2000 E P2 R P1 AD2000 AD2001 Y2 YFE

  20. 6.75 6.72 6.69 Real GDP ($ Trillions) 6.66 6.63 6.60 1989:3 1990:2 1991:1 1989:3 1990:2 1991:1 Year and Quarter Fig. 15a/b GDP and the Price Level in Two Recessions The 1990-91 Recession (b) (a) 140 CPI 135 130 125 120 Year and Quarter

  21. 2000:1 2001:1 Year and Quarter Fig. 15c/d GDP and the Price Level in Two Recessions The 2001 Recession (d) (c) 9.35 178 CPI 9.30 176 9.25 Real GDP ($ Trillions) 9.20 174 9.15 172 9.10 2000:1 2001:1 Year and Quarter

  22. After Average Recession After 2001 Recession After 1991 Recession Fig. 16 The Average Expansion Versus Two Recent Jobless Expansions Employment Index (Trough = 1) 1.04 1.03 1.02 1.01 1.00 0.99 -6 -4 -2 0 +2 +4 +6 +8 +10 +12 Months Before and After the Trough

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