ECON 20B

# Econ 20B Lecture 22 1

The Quantity of output supplied = natural rate of output + a (actual price level ­ expected price level) Short­run AS curve might shift
1. Changes in labor, capital, natural resources, technology
2. Expected price level increases, AS curve shifts left
3. Causes of economic fluctuations:
a. Assumption:
i.
Economic begins in long­run equilibrium
b. Long­Run equilibrium:
i.
intersection of AD and LRAS:
1. Output­natural rate
2. Actual price level
4. Intersection of AD and short run AS curve:
a. Expected price level = actual price level

b.

Shift in Aggregate demand:
1. Wave of pessimism ⇒ AD shifts left

2.

# Econ 20B Lecture 22 2

3.
4. Short Run:
a. Output falls, price level falls
5. Long Run:
a. SRAS shifts right
b. Output ­ natural rate
c. price level falls
6. Steps for analyzing fluctuations:
a. Start in equilibrium
b. Determine which curve will shift
c. Find the effect in the short run
d. Find the long­run equilibrium

Shifts in AS
1. Firms ­ increases in production costs
a. AS curve ­ shift left
2. Short­Run: stagflation
a. Output falls
b. Price level increase

c.

# Econ 20B Lecture 22 3

3. Long­Run:
a. If AD is held constant
i.
Output­ natural rate ii. price level decreases
b. If AD shifts to right (Policy)
i.
Output ­ natural rate ii. Price level increase

iii.

Problem 1: (P 754)

1. 2. Output falls, price level also decreases, unemployment rate increases
3. Nominal wages constant, the price level decreases, the real wages increases,