ad: aggregate demand; total amount of goods/services demanded at price level
sras/lras: aggregate supply; changes happen on y axis, x is response
sras: short run; how much real gdp firms supply at price level, can be curved (but linear here)
‘gdp firms supply’ is total output firms choose to produce, i.e. total production
lras: long run; change in price level will net the same gdp from firms after everything settles, straight vertical line
e: equilibrium; firms produce exactly amount buyers want to buy
ad-as model
increase in money supply → shifts ad right (more money to spend)
real gdp increases before sras adjusts → price level increases at e
wages increase → push sras curve left → price level increases at e
i.e. increasing money supply permanently increases price level
seignorage
seignorage: profits made from government printing more currency
inflation tax, reduction in value of money held by public to account for increased money printed to account for, e.g., budget deficit
output gap x unemployment
“1. When actual aggregate output is equal to potential output, the actual unemployment rate is equal to the natural rate of unemployment.”
“2. When the output gap is positive (an inflationary gap), the unemployment rate is below the natural rate. When the output gap is negative (a recessionary gap), the unemployment rate is above the natural rate.”
natural rate → unemployment when producing at potential
high unemployment → does not shift sras right
tight labor market → sras shifts left when wages increase
output gap → horizontal distance between sras e and lras before it adjusts back
okun’s law: 2% in output gap → 1% in unemployment gap
short run phillips curve
x = unemployment rate, y = inflation rate, downwards trend
down-right line based on negative correlation
expected inflation
contracts, wages, etc based on expectation
rising prices make paying higher wages more affordable, firm output sells for more
shifts sr phillips curve up by that amount
long run phillips curve
inflation expectations subside, short run phillips curve shifts back to long run
vertical line like the lras
nairu: nonaccelerating inflation rate of unemployment, i.e. keeping unemployment rate below nairu leads to accelerating inflation, cannot be maintained
disinflation
keeping unemployment below natural rate leads to accelerated inflation
us retreat from high inflation at beginning of 1980s cost 18% real gdp
deflation
falling aggregate price level, common before wwii
interest rate falls as a consequence, money will be worth more later
zero bound: interest rate will never reach 0% as consumers will hold money
liquidity trap: hoarding money supply as it increases value