Chapter 33

Chapter 33 is about analyzing short-run fluctuations with aggregate demand and aggregate supply curves. Economic fluctuations are irregular and unpredictable. Most macroeconomic quantities fluctuate together. Real GDP and investment spending have a direct relationship. As real GDP rises, investment spending rises. However, as real GDP rises, unemployment falls. They therefore have an inverse relationship. Most economics believe that classical theory describes the world in the long run but not in the short run. The aggregate demand curve is downward sloping while the short-run aggregate supply curve is upward sloping. The aggregate demand curve is downward sloping because wealthier consumers demand more consumption of goods, interest rates falling increases investment demand, and the depreciation of currency causes more demand of net exports. The aggregate demand curve might shift from changes in consumption, changes in investment, changes in government purchases, and changes in net exports. The long run aggregate supply curve is vertical because a change in the price level does not affect the quantity of goods and services supplied in the long run. The long run aggregate supply curve might shift from changes in labor, changes in capital, changes in natural resources, and changes in technological knowledge. The sticky-wage theory says wages are "sticky" in the short run, meaning that nominal wages are slow to adapt to new economic changes. The sticky-price theory says that prices of some goods are slow to adapt to new economic conditions. Stagflation is the economy experiencing both stagnation (falling output) and inflation (rising prices). Shifts in the aggregate supply can cause stagflation. Policymakers who can influence aggregate demand can potentially reduce the adverse impact on output but only at the cost of worsening the problem of inflation.