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Short-Run Economic
year to year. In most years production of goods and
services rises.
production in the U.S. economy has grown by
about percent per year.
causing a recession. 
 
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Short-Run Economic
"#$, falling incomes, and rising
 
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Three Key Facts About
unpredictable. %luctuations in the economy are often called
the business cycle.
&ost macroeconomic variables
 
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Recession s
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
$7,000
 
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Three Key Facts About
production fluctuate closely together.
!lthough many macroeconomic variables
different amounts.
 
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Recession s
A Loo At Short-Run Economic Fluctuations
 
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Three Key Facts About
Economic Fluctuations
!s output falls, unemployment rises. 'hanges in real "#$ are inversely related to
changes in the unemployment rate.
#uring times of recession, unemployment
rises substantially.
 
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Recession s
Percent of  Labor Force
 
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!o" the Short Run Di##ers
From the Long Run
theory describes the world in the long
run but not in the short run.
'hanges in the money supply affect nominal
variables but not real variables in the long
run.
not appropriate when studying year)to)year
changes in the economy.
 
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The $asic %odel o# Economic
Fluctuations
model to analy*e the short)run
fluctuations.
measured by real "#$.
or the "#$ deflator.
 
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The $asic %odel o# Economic
Fluctuations
demand and aggregate supply to eplain
short)run fluctuations in economic
 
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The $asic %odel o# Economic
Fluctuations
the -uantity of goods and services that
households, firms, and the government
want to buy at each price level.
 
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The $asic %odel o# Economic
Fluctuations
firms produce and sell at each price
level.
 
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Aggregate Demand and
 
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The Aggregate Demand Cur'e
(he four components of "#$ /
goods and services.
 
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The Aggregate-Demand Cur'e&&&
Quantity o !utput
+& A decrease in the price le'el&&&
 
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,hy the Aggregate Demand
Cur'e s Do"n"ard Sloping
3ealth Effect
Interest 4ate Effect
Echange)4ate Effect
 
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The .rice Le'el and Consumption/
The ,ealth E##ect
(his increase in consumer spending
means larger -uantities of goods and
services demanded.
 
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The .rice Le'el and n'estment/
The nterest Rate E##ect
! lower price level reduces the interest
rate, which encourages greater spending
on investment goods.
means a larger -uantity of goods and
services demanded.
 
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The .rice Le'el and net E0ports/
The E0change-Rate E##ect
echange rate depreciates, which
stimulates U.S. net eports.
(he increase in net eport spending
means a larger -uantity of goods and
services demanded.
 
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,hy the Aggregate Demand
Cur'e %ight Shi#t
demand curve shows that a fall in the price
level raises the overall -uantity of goods and
services demanded.
-uantity of goods and services demanded at
any given price level.
aggregate demand curve shifts.
 
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,hy the Aggregate Demand
Cur'e %ight Shi#t
Shifts arising from 'onsumption
Shifts arising from Investment
Shifts arising from "overnment
 
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Shi#ts in the Aggregate Demand
Cur'e&&&
 
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The Aggregate Supply Cur'e
supply curve is vertical.
supply curve is upward sloping.
 
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The Long-Run Aggregate
labor, capital, and natural resources and on
the available technology used to turn these
factors of production into goods and services.
(he price level does not affect these variables
in the long run.
 
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The Long-Run Aggregate-
 
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The Long-Run Aggregate
is vertical at the natural rate of
output.
full)employment output.
 
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,hy the Long-Run Aggregate
!ny change in the economy that alters
the natural rate of output shifts the long)
run aggregate)supply curve.
model that affect output.
 
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,hy the Long-Run Aggregate
Shifts arising from 1abor
Shifts arising from 'apital
Shifts arising from atural
 
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1. n t!e lon"#rn, tec!nolo"ical %ro"ress s!ifts lon"# rn a""re"ate s%%l&...
R!"###R!"**#
Quantity o  !utput
supply shifts aggregate-demand...
 
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Long-Run 1ro"th and n#lation
Short)run fluctuations in output and
price level should be viewed as
deviations from the continuing long)
run trends.
 
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,hy the Short-Run Aggregate
Short Run
overall level of prices in the economy
tends to raise the -uantity of goods and
services supplied.
reduce the -uantity of goods and services
supplied.
 
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The Short-Run Aggregate
Y 2
2. re'ces t!e (antit& of "oo's an' ser)ices s%%lie' in t!e s!ort rn.
P2
 
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,hy the Short-Run Aggregate
the Short Run
(he &isperceptions (heory
(he Stic6y)3age (heory
(he Stic6y)$rice (heory
 
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The %isperceptions Theory
the mar6ets in which they sell their output2
! lower price level causes misperceptions
about relative prices. (hese misperceptions induce suppliers to
decrease the -uantity of goods and services
supplied.
 
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The Sticy-,age Theory
9stic6y: in the short run2
3ages do not ad8ust immediately to a fall in
the price level.
and production less profitable.
goods and services supplied.
 
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The Sticy-.rice Theory
sluggishly in response to changing economic
conditions2
some firms with higher)than)desired prices.
(his depresses sales, which induces firms to
reduce the -uantity of goods and services
they produce.
 
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,hy the Aggregate Supply
Cur'e %ight Shi#t
Shifts arising from 1abor
Shifts arising from 'apital
Shifts arising from (echnology.
1evel.
 
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!n increase in the epected price level
reduces the -uantity of goods and services
supplied and shifts the short)run aggregate
supply curve to the left.
! decrease in the epected price level raises
the -uantity of goods and services supplied
and shifts the short)run aggregate supply
curve to the right.
,hy the Aggregate Supply
Cur'e %ight Shi#t
 
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The Long-Run E*uilibrium
 !D
2
Quantity o  !utput
 
 !"
2
.P#
3. bt o)er ti+e, t!e s!ort#rn a""re"ate# s%%l& cr)e s!ifts
4. an' ot%t retrns
 
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Shi#ts in Aggregate Demand
In the short run, shifts in aggregate
demand cause fluctuations in the
economy+s output of goods and services.
In the long run, shifts in aggregate
demand affect the overall price level but
do not affect output.
 
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An Ad'erse Shi#t in Aggregate
Supply
of aggregate supply shifts the curve to
the left2
employment.
 
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1. *n a')erse s!ift in t!e s!ort#rn a""re"ate#s%%l& cr)e
 !"2
Quantity o  !utput
 
P2
-
 
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Stag#lation
recession and inflation. Output falls and prices rise.
$olicyma6ers who can influence aggregate
demand cannot offset both of these adverse
effects simultaneously.
 
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.olicy Responses to
#o nothing and wait for prices and wages to
ad8ust.
using monetary and fiscal policy.
 
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 !"2
Accommodating an Ad'erse Shi#t
in Aggregate Supply&&&
Quantity o  !utput
 
4. bt /ee%s ot%t at its natral rate.
 
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The E##ects o# a Shi#t in
Aggregate Supply
stagflation < a combination of recession
and inflation.
these adverse effects simultaneously.
 
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Summary
fluctuations around long)run trends.
unpredictable.
measures of income, spending, and
production fall, and unemployment rises.
 
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Summary
and aggregate supply model.
of goods and services and the overall level
of prices ad8ust to balance aggregate
demand and aggregate supply.
 
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Summary
effect, an interest rate effect, and an
echange rate effect.
consumption, investment, government
level will shift the aggregate)demand
curve.
 
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Summary
is vertical.
is upward sloping.
upward slope of short)run aggregate
supply2 the misperceptions theory, the
stic6y)wage theory, and the stic6y)price
theory.
 
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Summary
produce output will shift the short)run
aggregate)supply curve.
aggregate)supply curve depends on the
epected price level.
 
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Summary
fluctuations is a shift in aggregate
supply.
and rising prices.
 
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"raphical
4eview
 
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Recession s
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
$7,000
 
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Recession s
A Loo At Short-Run Economic Fluctuations
 
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Recession s
Percent of  Labor Force
 
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Aggregate Demand and
 
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The Aggregate-Demand Cur'e&&&
Quantity o !utput
+& A decrease in the price le'el&&&
 
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Shi#ts in the Aggregate Demand
Cur'e&&&
 
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The Long-Run Aggregate-
 
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Long-Run 1ro"th and n#lation&&&
1. n t!e lon"#rn, tec!nolo"ical %ro"ress s!ifts lon"# rn a""re"ate s%%l&...
R!"###R!"**#
supply shifts aggregate-demand...
 
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The Short-Run Aggregate
Y 2
2. re'ces t!e (antit& of "oo's an' ser)ices s%%lie' in t!e s!ort rn.
P2
 
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The Long-Run E*uilibrium
1. * 'ecrease in a""re"ate 'e+an'
 !D
 
 !"
2
.P#
3. bt o)er ti+e, t!e s!ort#rn a""re"ate# s%%l& cr)e s!ifts
4. an' ot%t retrns
 
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An Ad'erse Shi#t in Aggregate Supply&&&
1. *n a')erse s!ift in t!e s!ort#rn a""re"ate#s%%l& cr)e
 !"2
Quantity o  !utput
P2
-
 
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Accommodating an Ad'erse Shi#t
in Aggregate Supply&&&
Quantity o  !utput
 
4. bt /ee%s ot%t at its natral rate.