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Lecture 13 (Ch7 II) ECON2123 LI Fall2012 Stu
Lecture 13 (Ch7 II) ECON2123 LI Fall2012 Stu
Y
A S R e la tio n P P (1 ) F 1 , z
e
L
M
A D R e la tio n Y Y ,G ,T
P
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7-3 EQUILIBRIUM IN THE SHORT RUN
AND IN THE MEDIUM RUN
Equilibrium in the Short Run
Figure 7 - 5 (taking expected price as given)
The Short-Run
Equilibrium
The equilibrium is given by the
intersection of the aggregate
supply curve and the
aggregate demand curve. At
point A, the labor market, the
goods market, and financial
market are all in equilibrium.
The aggregate supply curve AS is
drawn for a given value of Pe. The
higher the level of output, the
higher the price level.
The aggregate demand curve AD
is drawn for given values of M, G,
and T. The higher the price level
is, the lower the level of output.
5
7-3 EQUILIBRIUM IN THE SHORT RUN
AND IN THE MEDIUM RUN
From the Short Run to the Medium Run
At point A,
Y Yn P P e
6
7-3 EQUILIBRIUM IN THE SHORT RUN
AND IN THE MEDIUM RUN
From the Short Run to the Medium Run
Figure 7 - 6
The Adjustment of
Output over Time
If output is above the natural
level of output, the AS curve
shifts up over time until output
has fallen back to the natural
level of output.
Y Yn and P P e
7
7-3 EQUILIBRIUM IN THE SHORT RUN
AND IN THE MEDIUM RUN
From the Short Run to the Medium Run
Let’s summarize:
9
7-4 THE EFFECTS OF A MONETARY EXPANSION
The Dynamics of Adjustment
M
Y Y ,G ,T
P
Theneutrality of money in the medium run does not mean that monetary policy
cannot or should not be used to affect output.
How Long Lasting Are the Real Effects of Money?
Figure 1
The Effects of an
Expansion in
Nominal Money in
the Taylor Model
In the medium run, output returns to the natural level of output, and the
interest rate is lower. A deficit reduction leads unambiguously to an
increase in investment. (Y unchanged; I increases.)