AD SHIFTS LEFT

SAS SHIFTS UP

Import prices of

SAS SHIFTS UP

Workers expect

production=income. production creates an equal amount of income, so the 45* line represents production=income

expenditures that do not systematically vary with income

• remain constant at all levels of income

expenditures that change as income changes

• when income changes, they change by less than income

The Multiplier Equation

• can be used to fid equilibrium income

• how much income will change in response to a change in autonomous expenditures
• as the mpe increases, the multiplier increases

• shows the relationship between different price levels and different equilibria in the goods market
• shows the relationship between different price levels and different equilibria in the goods market

• in the long run, saving leads to investment and growth
• in the short run, saving may lead to a decrease in spending, output, and employment

• shows how a shift in AD affects the price level and real output in the short-run

• shows the output that an economy can produce at full employment of labor and capital

• Foreign Income
• Exchange Rates
• Expectations
• Distribution of Income
• Government AD Management Policies(fiscal & monetary)

• Auction Markets- prices are determined by demand and supply
• ( more prices = more profits= more quantity supplied)
• Posted-price markets- prices are set by producers and don't often change; firms respond to changes in demand by adjusting output instead of prices

• input prices
• expectations
• sales and excise taxes
• productivity
• import prices

• the amount of goods and services an economy can produce when both capital and labor are fully employed
• the position of the LAS curve depends on this

What leads the LAS to shift to the right?

• increases in capital
• resources
• growth-compatible institutions
• technology
• entrepreneurship increase potential output

Recessionary Gap

the amount by which equilibrium output is above potential output

To eliminate a recessoionary gap, fiscal policy should

Government Spending

Taxation

Change interest rates

Change money supply

Change access to credit