Today we will learn about short-run macroeconomic fluctuations and how they are illustrated in AS-AD. Specifically, we will discuss the concepts of recessionary and inflationary gaps. Finally, we will see how the economy self-corrects in the long-run. You should have read the text chapter identified below in the homework section and watched the related videos. We will start class today with you working cooperatively with a partner to find a solution to the "Problem of the Day" and then there will be a lecture on our next topic. This page contains all the information you need for today's class: homework, the problem of the day, helpful resources (videos, podcasts, etc.) and an explanation of the activities we will do in class. Use the table of contents on the right to help you navigate.
Watch the following video.
Problem of the Day: You will work cooperatively with your partner to construct a response to the following prompt.
Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.
Draw an AS-AD diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and real output. Explain in words why the aggregate quantity of output demanded changes.
How might the investment boom affect the long-run aggregate supply curve? Explain.
Draw a new diagram to show the new long-run equilibrium of the economy. Explain in words why each of the following changes in the long-run.
LRAS
SRAS
AD
Lecture