The Macro Model in the Short-run and the Long-run

INTRODUCTION

Today we build on the microeconomic concepts of supply and demand by introducing the AS-AD model, which will be the main model we use to explain the macroeconomy. You should have read the text pages identified below in the homework section and watched the related videos. This page contains all the information you need for today's class. Use the table of contents on the right to help you navigate.

HOMEWORK

Read Mankiw (Pages 531-552) and Thomas (Chapter 6). Also, watch the following videos.

ASSESSMENTS AND ACTIVITIES

Lecture:

• Aggregate Demand

• Short-run Aggregate Supply and General Equilibrium

• Long-run Aggregate Supply, Economic Growth, and Economic Development

• Short-run inflationary and recessionary gaps and the adjustment to the long-run

ENRICHMENT

Problems of the Day (optional)

#1

1. Define aggregate demand.

2. Explain why the aggregate demand curve is downward sloping.

3. In 1939, with the U.S. economy not yet fully recovered from the Great Depression, President Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the shopping period before Christmas would be longer. Explain what President Roosevelt might have been trying to achieve, using what you know about the concept of aggregate demand.

#2

1. Explain the theory of "sticky wages" and why the existence of sticky wages would cause the short-run aggregate supply curve to slope upward.

2. Explain why the long-run aggregate supply curve is vertical.

#3

1. Define economic growth.

   1. Use both the production possibilities model and the model of aggregate supply and aggregate demand to illustrate economic growth.

   2. Use production possibilities and AS-AD to explain why the United Nations often targets improvements in education in poor countries in order to improve their economies.

#4

Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.

1. 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.

2. How might the investment boom affect the long-run aggregate supply curve? Explain.

3. 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.

   1. • LRAS

      • SRAS

      • AD

Khan Academy Videos

Related Readings

• Investment

• The Great Depression

• Japan's Lost Decade

• Disaster and Recovery

• Investment

• Saving

• Economic Growth

• Empirics of Economic Growth

• Natural (land) Resources

• Population

• Saving

• Telecommunications (Globalization)

• Space Bridging (Globalization)

• A Cell Phone for Every Woman

• The German Economic Miracle

• Japan after WWII

• The Industrial Revolution and the Standard of Living

• Education

• Immigration

• Transition Economies

• Global Attitudes Regarding Sustainable Development

• The Magic of Microcredit

• King Ludd is Still Dead

• Pass the Books, Hold the Oil

• What is the Wealth of a Nation?

• Human Capital

• The Great Depression

• Japan's Lost Decade

• Structural Unemployment

• Okun's Gap

Additional Resources

• Commanding Heights: Click the link above for resources related to this PBS documentary. We may watch a few clips from the video in class. You can watch the whole series by streaming it online, if you're interested by clicking here. It's a really engaging and relatively contemporary view of development and globalization.