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Economics 14

Lecture 15: Aggregate Demand and Aggregate Supply, Continued

shifts of the AS curve
causes of inflation
causes of a recession

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Shifts of the AS Curve

• input prices
  • higher input prices AS curve shifts up to the left
  • lower input prices AS curve shifts down to the right
• productivity
  • higher productivity AS curve shifts down to the right
  • lower productivity AS curve shifts up to the left
• government regulation
  • more regulation AS curve shifts up to the left
  • less regulation AS curve shifts down to the right

Causes of Inflation

1. demand-pull inflation - increase in aggregate demand
2. cost-push inflation - decrease in aggregate supply

Causes of a Recession

1. a fall in aggregate demand

   A fall in aggregate demand shifts the AD curve to the left: total spending in the economy decreases at every price level. In response to the fall in demand, some firms lower prices but others reduce output and employment. Real GDP falls below the full employment level.

2. decrease in aggregate supply (supply shock)

   A supply shock such as a rise in oil prices causes the AS curve to shift up to the left: the economy's total output falls

David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31