Monday, January 12, 2015

Aggregate Demand & Supply Cheat Sheet

Aggregate Demand & Supply Cheat Sheet 
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Tentative,,  AP FRQ Cheat sheet. It is very clear that the bulk of recent past exams have been moving from equilibrium/ recession to recession/recession-LR. Still, knowing that in the short-run, the SRAS curve (usually) does not shift and so a movement during this time usually starts with fiscal policy actions (government spending) that increases AD to push the economy back to equilibrium. Get familiar with the terminology of how the College board asks these questions (triggers), you must understand all of these graphs!!!!

I'll write that again, in the short-run (For the AP) the SRAS (usually) does not shift,, only AD. 
(As some questions are stand alone questions this rule is for questions that usually involve starting the economy in equilibrium or recession,, moving into recession and then the government refraining from action. Over time prices and wages adjust, a shifting of the SRAS) 

In the Long-Run , SRAS shifts moving the economy back to equilibrium. 

Let me see if I can be a bit more clear.

The SRAS curve obviously can shift in the Short-Run as it does when Negative supply shocks occur 2004B & 2006(Stagflation) or when Positive supply shocks occur (Economic Growth) or when the government decides to lower business taxes(2004B) to offset the effects of Stagflation. (think, Keynesianism) 

The difference being that SRAS shifts on its own in the long-run to offset happenings in the economy. If the economy has been experiencing inflation (rising production costs) the firm will (in the long-run) begin to reduce employment and output, while passing higher costs onto consumers as higher prices. The economy will return to equilibrium (with higher PL's),, the point to be taken away is that in the LR the economy will be self correcting with a shifting of the SRAS curve. (think classical/monetarists economists and flexible prices & wages).

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