Chapter 10 ECON

Unanticipated change

A change that decision makers could not reasonably foresee. The choices they made prior to the change did not take it into account.

Supply Shocks

An unexpected event that temporarily increases or decreases aggregate supply

Anticipated Change

Change seen by decision makers in time for them to make adjustments

Short run aggregate supply curve (Changes in short run aggregate supply) SRAS

Changes can sometimes influence current output without altering the economy's long-run capacity 1. Changes in resource prices 2. Changes in the expected rate of inflation 3. Supply Shocks

Changes in aggregate demand

Changes in real wealth, real interest rate, consumers' and producers' expectations, expected rate of inflation, income abroad, exchange rates.

Changes in the expected rate of inflation

Consumers have expectations that inflation will increase or decrease. Increase in expectations leads to an increase in Consumer Aggregate Demand.

Changes consumers' and producers' expectations

Expectations of a downtrend in the economy causes them to cut back in their spending, decreasing aggregate demand.

The determinants of aggregate demand

Factors that cause the aggregate demand curve to shift An increase in aggregate demand appears as a rightward shift of the aggregate demand curve. A decrease in aggregate demand appears as a leftward shift in the aggregate demand curve.

The determinate of aggregate supply

Factors that cause the aggregate supply curve to shift. An increase in aggregate supply appears as a rightward shift of the aggregate supply curve. A decrease in aggregate supply appears as a leftward shift of the aggregate supply curve.

Changes in income abroad

Germany Income increases, their demand for our goods increases, therefore increasing aggregate demand in the US.

Unanticipated increases in short run aggregate supply

Impact is temporary, increases in aggregate supply that might result from a bumper crop caused by favorable weather, for example. The increase in aggregate supply, shifting it to SRAS2 , will lead to a lower price level of P95 and an increase in current GDP to Y2. Because the favorable

Unanticipated decreases in short run aggregate supply

In the 1970s the OPEC oil embargo caused a sudden and significant increase in oil prices which increased cost of production in the US. This caused a leftward shift of the short run AS curve, causing output to decrease below the full employment level and the price level t increase, resulting in - cost just inflation. -

Unanticipated increase in aggregate demand

In the short run results in an increase in output above the full employment level and an increase in the price level, resulting in demand pull inflation. In the long run nominal wages (production costs) will increase and the short run AS curve will shift leftward until it intersects the AD curve on the long run AS curve at the full employment level of output. Therefore in the long run, output returns to the full employment level and the price level increases further.

What happens in the short run with an unanticipated increase/decrease

In the short run, the economy's output will deviate from full-employment capacity when prices in he goods and services market deviate from the price level people anticipated.

Changes in exchange rates

Increase/decrease in the euro per dollar exchange rate, leads to an increase or decrease in aggregate demand.

Changes in the real interest rate

Interest rate typically alters business investment expenditures.

Changes in Real Wealth

Refers to all the accumulated assets that you have backing up your finances, acts as a safety net

Unanticipated Decrease in aggregate demand

The short run impact of an unanticipated fall in aggregate demand, shifting AD1 to AD2 , will be a decline in output to Y2 and a lower price level of P95. Temporarily, profit margins will decline, output will fall and unemployment will rise above its natural rate. In the long run, weak demand and excess supply in the resource market will lead to lower wages and resource prices. This will lower production costs, leading to an expansion in short-run aggregate supply. shifting it to SRAS2. The restoring of equilibrium may be both painful and lengthy.

The effects of an adverse Supply Shock

Unanticipated fall in the economy's supply of resources, (perhaps because of a crop failure or sharp increase in the price of a major imported resource like oil) Resources prices will rise from Pr to P'r'. The resource prices will shift the SRAS curve to the left. In the short run, the price level will rise to P110' and output will decline to Y2. What happens in the long run depends on whether the reduction in the supply of resources is temporary or permanent. If it is temporary, resource prices will fall in the future, permitting the economy to return to its initial equilibrium (E1). Conversely, if it's permanent, the production capacity of the economy will shrink, shifting LRAS to the left, and e2 will become the new long run equilibrium.

Unanticipated changes in aggregated demand/supply will .....

disrupt long run equilibrium in the goods and services market

Long run aggregate supply curve (Changes in Long run aggregate supply) LRAS

shows the maximum rate of sustainable output of an economy given its current (1) resources base, (2) level of technology, and (3) institutional arrangements that affect its productivity and efficient use of resources.