[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.24,0:00:01.07,Default,,0000,0000,0000,,- [Instructor] In our last video,
Dialogue: 0,0:00:01.07,0:00:03.96,Default,,0000,0000,0000,,we talked about the states\Nof short run equilibrium
Dialogue: 0,0:00:03.96,0:00:06.15,Default,,0000,0000,0000,,that a country's economy could experience.
Dialogue: 0,0:00:06.15,0:00:09.78,Default,,0000,0000,0000,,We showed in AD/AS graphs,\Nwhat positive output gaps
Dialogue: 0,0:00:09.78,0:00:12.51,Default,,0000,0000,0000,,and what negative output gaps look like.
Dialogue: 0,0:00:12.51,0:00:14.70,Default,,0000,0000,0000,,In this video, we're going\Nto actually step back
Dialogue: 0,0:00:14.70,0:00:16.59,Default,,0000,0000,0000,,a little bit and talk about the factors
Dialogue: 0,0:00:16.59,0:00:20.22,Default,,0000,0000,0000,,that could cause positive and\Nnegative output gaps to occur
Dialogue: 0,0:00:20.22,0:00:21.45,Default,,0000,0000,0000,,in a country.
Dialogue: 0,0:00:21.45,0:00:23.25,Default,,0000,0000,0000,,The term we're gonna be\Ntalking about in this video
Dialogue: 0,0:00:23.25,0:00:27.27,Default,,0000,0000,0000,,is shocks to aggregate\Ndemand and aggregate supply.
Dialogue: 0,0:00:27.27,0:00:29.34,Default,,0000,0000,0000,,We're gonna use some graphs to illustrate
Dialogue: 0,0:00:29.34,0:00:33.03,Default,,0000,0000,0000,,both positive and negative\Ndemand and supply shocks
Dialogue: 0,0:00:33.03,0:00:35.37,Default,,0000,0000,0000,,and talk about how a\Ncountry's economy will adjust
Dialogue: 0,0:00:35.37,0:00:38.43,Default,,0000,0000,0000,,in the short run to a new\Nequilibrium following a shock
Dialogue: 0,0:00:38.43,0:00:40.68,Default,,0000,0000,0000,,to either AD or AS.
Dialogue: 0,0:00:40.68,0:00:43.23,Default,,0000,0000,0000,,Let's start with the\Ndefinition of demand shocks.
Dialogue: 0,0:00:43.23,0:00:45.72,Default,,0000,0000,0000,,We'll actually define\Npositive demand shocks first,
Dialogue: 0,0:00:45.72,0:00:47.37,Default,,0000,0000,0000,,and then we'll show the effect
Dialogue: 0,0:00:47.37,0:00:49.14,Default,,0000,0000,0000,,that a positive demand shock would have
Dialogue: 0,0:00:49.14,0:00:50.73,Default,,0000,0000,0000,,on a country's economy.
Dialogue: 0,0:00:50.73,0:00:54.21,Default,,0000,0000,0000,,A positive demand shock occurs\Nanytime there is an increase
Dialogue: 0,0:00:54.21,0:00:58.74,Default,,0000,0000,0000,,in AD resulting from an\Nincrease in either consumption,
Dialogue: 0,0:00:58.74,0:01:01.71,Default,,0000,0000,0000,,investment, government\Nspending, or net exports.
Dialogue: 0,0:01:01.71,0:01:04.02,Default,,0000,0000,0000,,If aggregate demand\Nincreases due to an increase
Dialogue: 0,0:01:04.02,0:01:06.51,Default,,0000,0000,0000,,in one of the different\Nnational expenditures,
Dialogue: 0,0:01:06.51,0:01:09.03,Default,,0000,0000,0000,,we can show the effect that\Nthis will have in the short run
Dialogue: 0,0:01:09.03,0:01:10.71,Default,,0000,0000,0000,,in our AD/AS graph.
Dialogue: 0,0:01:10.71,0:01:14.64,Default,,0000,0000,0000,,So let's assume that due to an\Nincrease in household wealth
Dialogue: 0,0:01:14.64,0:01:17.04,Default,,0000,0000,0000,,as a result of rising home prices,
Dialogue: 0,0:01:17.04,0:01:20.34,Default,,0000,0000,0000,,households decide to consume\Nmore goods and services
Dialogue: 0,0:01:20.34,0:01:22.41,Default,,0000,0000,0000,,at every price level.
Dialogue: 0,0:01:22.41,0:01:25.59,Default,,0000,0000,0000,,This causes an increase in\Naggregate demand to AD1.
Dialogue: 0,0:01:26.70,0:01:29.25,Default,,0000,0000,0000,,Now, let's look at the\Neffect that this would have
Dialogue: 0,0:01:29.25,0:01:30.99,Default,,0000,0000,0000,,on the nation's economy,
Dialogue: 0,0:01:30.99,0:01:34.11,Default,,0000,0000,0000,,assuming there is no\Nchange in the price level
Dialogue: 0,0:01:34.11,0:01:35.82,Default,,0000,0000,0000,,and then assuming the price level adjusts
Dialogue: 0,0:01:35.82,0:01:37.32,Default,,0000,0000,0000,,to the new level of aggregate demand.
Dialogue: 0,0:01:37.32,0:01:39.24,Default,,0000,0000,0000,,This will look quite\Nfamiliar to any student
Dialogue: 0,0:01:39.24,0:01:40.80,Default,,0000,0000,0000,,who has already studied microeconomics
Dialogue: 0,0:01:40.80,0:01:43.77,Default,,0000,0000,0000,,and knows that if demand for\Na particular good increases
Dialogue: 0,0:01:43.77,0:01:46.11,Default,,0000,0000,0000,,and there is no corresponding\Nincrease in the price
Dialogue: 0,0:01:46.11,0:01:47.97,Default,,0000,0000,0000,,of that good, then we will have
Dialogue: 0,0:01:47.97,0:01:51.00,Default,,0000,0000,0000,,what's called a disequilibrium\Nin the short run.
Dialogue: 0,0:01:51.00,0:01:53.07,Default,,0000,0000,0000,,And the same is true on\Na macroeconomic level.
Dialogue: 0,0:01:53.07,0:01:54.69,Default,,0000,0000,0000,,If aggregate demand
Dialogue: 0,0:01:54.69,0:01:57.33,Default,,0000,0000,0000,,due to increased household\Nwealth and consumption
Dialogue: 0,0:01:57.33,0:01:59.55,Default,,0000,0000,0000,,and there is no increase in prices,
Dialogue: 0,0:01:59.55,0:02:02.67,Default,,0000,0000,0000,,there will be a quantity\Nof output demanded
Dialogue: 0,0:02:02.67,0:02:05.43,Default,,0000,0000,0000,,that is greater than the\Nquantity of output supplied.
Dialogue: 0,0:02:05.43,0:02:08.85,Default,,0000,0000,0000,,So here we have a disequilibrium.\NThere will be a shortage.
Dialogue: 0,0:02:08.85,0:02:12.30,Default,,0000,0000,0000,,This would be a shortage\Nof goods and services
Dialogue: 0,0:02:12.30,0:02:14.91,Default,,0000,0000,0000,,in the United States if\Naggregate demand increases
Dialogue: 0,0:02:14.91,0:02:17.52,Default,,0000,0000,0000,,and there is no corresponding\Nincrease in the price level.
Dialogue: 0,0:02:17.52,0:02:19.26,Default,,0000,0000,0000,,So just like in microeconomics,
Dialogue: 0,0:02:19.26,0:02:21.69,Default,,0000,0000,0000,,if there is a disequilibrium in a market,
Dialogue: 0,0:02:21.69,0:02:24.21,Default,,0000,0000,0000,,that market must adjust
Dialogue: 0,0:02:24.21,0:02:27.33,Default,,0000,0000,0000,,in the form of rising prices in this case.
Dialogue: 0,0:02:27.33,0:02:31.20,Default,,0000,0000,0000,,So demand pull inflation will result
Dialogue: 0,0:02:31.20,0:02:33.66,Default,,0000,0000,0000,,from a positive demand shock.
Dialogue: 0,0:02:33.66,0:02:37.14,Default,,0000,0000,0000,,Demand pull inflation is\Na rise in the price level
Dialogue: 0,0:02:37.14,0:02:40.56,Default,,0000,0000,0000,,resulting from an increase\Nin aggregate demand.
Dialogue: 0,0:02:40.56,0:02:41.85,Default,,0000,0000,0000,,Here we can see that here
Dialogue: 0,0:02:41.85,0:02:45.24,Default,,0000,0000,0000,,we have a new equilibrium\Nprice level of PL2.
Dialogue: 0,0:02:45.24,0:02:47.37,Default,,0000,0000,0000,,The higher price level\Nof goods and services
Dialogue: 0,0:02:47.37,0:02:50.73,Default,,0000,0000,0000,,incentivizes businesses\Nto increase the quantity
Dialogue: 0,0:02:50.73,0:02:52.68,Default,,0000,0000,0000,,of output that they produce,
Dialogue: 0,0:02:52.68,0:02:56.58,Default,,0000,0000,0000,,and it reduces the quantity of\Noutput demanded by households
Dialogue: 0,0:02:56.58,0:02:58.68,Default,,0000,0000,0000,,who previously had increased\Nthe amount of output
Dialogue: 0,0:02:58.68,0:03:00.75,Default,,0000,0000,0000,,they demanded due to rising wealth.
Dialogue: 0,0:03:00.75,0:03:03.72,Default,,0000,0000,0000,,And we achieve a new\Nequilibrium, I'll call this YE1,
Dialogue: 0,0:03:05.10,0:03:08.00,Default,,0000,0000,0000,,a new equilibrium at\Nthe intersection of SRAS
Dialogue: 0,0:03:08.00,0:03:09.18,Default,,0000,0000,0000,,and aggregate demand.
Dialogue: 0,0:03:09.18,0:03:11.31,Default,,0000,0000,0000,,In the short run, an\Nincrease in aggregate demand
Dialogue: 0,0:03:11.31,0:03:14.40,Default,,0000,0000,0000,,will cause an increase in\Noutput beyond full employment
Dialogue: 0,0:03:14.40,0:03:16.77,Default,,0000,0000,0000,,and an increase in the\Naverage price level,
Dialogue: 0,0:03:16.77,0:03:20.35,Default,,0000,0000,0000,,this is called demand pull inflation
Dialogue: 0,0:03:21.39,0:03:24.12,Default,,0000,0000,0000,,and an increase in the\Nquantity of output demanded
Dialogue: 0,0:03:24.12,0:03:25.74,Default,,0000,0000,0000,,and supplied in the economy.
Dialogue: 0,0:03:26.73,0:03:28.50,Default,,0000,0000,0000,,A positive demand shock occurs
Dialogue: 0,0:03:28.50,0:03:30.03,Default,,0000,0000,0000,,when aggregate demand increases.
Dialogue: 0,0:03:30.03,0:03:32.64,Default,,0000,0000,0000,,That of course, means that\Na negative demand shock
Dialogue: 0,0:03:32.64,0:03:35.34,Default,,0000,0000,0000,,when there is a decrease in AD
Dialogue: 0,0:03:35.34,0:03:40.34,Default,,0000,0000,0000,,resulting from a decrease\Nin consumption, investment,
Dialogue: 0,0:03:40.41,0:03:43.20,Default,,0000,0000,0000,,government spending, or net exports.
Dialogue: 0,0:03:43.20,0:03:44.61,Default,,0000,0000,0000,,Let's assume, for example,
Dialogue: 0,0:03:44.61,0:03:47.40,Default,,0000,0000,0000,,that interest rates rise in the economy
Dialogue: 0,0:03:47.40,0:03:49.14,Default,,0000,0000,0000,,leading firms to demand
Dialogue: 0,0:03:49.14,0:03:51.84,Default,,0000,0000,0000,,less new capital equipment and technology
Dialogue: 0,0:03:51.84,0:03:54.84,Default,,0000,0000,0000,,causing a decrease in\Nprivate sector investment.
Dialogue: 0,0:03:54.84,0:03:58.47,Default,,0000,0000,0000,,Falling investment means\Nthat at every price level,
Dialogue: 0,0:03:58.47,0:04:00.69,Default,,0000,0000,0000,,there will be a smaller quantity of goods
Dialogue: 0,0:04:00.69,0:04:04.08,Default,,0000,0000,0000,,and services demanded by the\Nnation's firms and households.
Dialogue: 0,0:04:04.08,0:04:06.48,Default,,0000,0000,0000,,So what happens if the price level remains
Dialogue: 0,0:04:06.48,0:04:08.34,Default,,0000,0000,0000,,at the original price level of PLE?
Dialogue: 0,0:04:09.90,0:04:12.78,Default,,0000,0000,0000,,Well, there would be, once\Nagain a disequilibrium.
Dialogue: 0,0:04:12.78,0:04:16.68,Default,,0000,0000,0000,,The quantity of output\Ndemanded, I'll call that YD,
Dialogue: 0,0:04:16.68,0:04:19.29,Default,,0000,0000,0000,,would be less than the\Nquantity of output supplied,
Dialogue: 0,0:04:19.29,0:04:22.59,Default,,0000,0000,0000,,resulting in a surplus of\Ngoods and services produced
Dialogue: 0,0:04:22.59,0:04:24.00,Default,,0000,0000,0000,,in this country.
Dialogue: 0,0:04:24.00,0:04:26.07,Default,,0000,0000,0000,,To restore equilibrium,
Dialogue: 0,0:04:26.07,0:04:29.16,Default,,0000,0000,0000,,the equilibrium price level must fall
Dialogue: 0,0:04:29.16,0:04:31.80,Default,,0000,0000,0000,,leading to an increase in the\Nquantity of output demanded
Dialogue: 0,0:04:31.80,0:04:34.86,Default,,0000,0000,0000,,by households and firms and\Nthe government and foreigners,
Dialogue: 0,0:04:34.86,0:04:37.50,Default,,0000,0000,0000,,and a decrease in the\Nquantity of outputs supplied
Dialogue: 0,0:04:37.50,0:04:38.91,Default,,0000,0000,0000,,by the nation's producers.
Dialogue: 0,0:04:38.91,0:04:40.98,Default,,0000,0000,0000,,As the price level falls,
Dialogue: 0,0:04:40.98,0:04:43.93,Default,,0000,0000,0000,,we're gonna see a new equilibrium at PL2
Dialogue: 0,0:04:45.54,0:04:47.87,Default,,0000,0000,0000,,and a new equilibrium\Nlevel of output at YE1.
Dialogue: 0,0:04:52.26,0:04:56.13,Default,,0000,0000,0000,,A negative demand shock\Ncauses what we call deflation.
Dialogue: 0,0:04:56.13,0:04:58.18,Default,,0000,0000,0000,,This is a fall in the average price level
Dialogue: 0,0:04:59.79,0:05:02.64,Default,,0000,0000,0000,,or, depending on the level of\Ninflation at full employment,
Dialogue: 0,0:05:02.64,0:05:04.62,Default,,0000,0000,0000,,this might just be a fall\Nin the inflation rate,
Dialogue: 0,0:05:04.62,0:05:06.57,Default,,0000,0000,0000,,which is known as disinflation.
Dialogue: 0,0:05:06.57,0:05:08.46,Default,,0000,0000,0000,,In other words, if\Ninflation is still positive,
Dialogue: 0,0:05:08.46,0:05:10.35,Default,,0000,0000,0000,,but it's just lower than it was
Dialogue: 0,0:05:10.35,0:05:11.91,Default,,0000,0000,0000,,while the economy is at full employment,
Dialogue: 0,0:05:11.91,0:05:13.35,Default,,0000,0000,0000,,then we don't see prices actually fall,
Dialogue: 0,0:05:13.35,0:05:15.33,Default,,0000,0000,0000,,we just see lower rates of inflation.
Dialogue: 0,0:05:15.33,0:05:18.87,Default,,0000,0000,0000,,A negative demand shock\Ncauses a decrease in output,
Dialogue: 0,0:05:18.87,0:05:20.79,Default,,0000,0000,0000,,a decrease in the price level,
Dialogue: 0,0:05:20.79,0:05:23.64,Default,,0000,0000,0000,,and a new equilibrium\Nlevel of national output
Dialogue: 0,0:05:23.64,0:05:25.38,Default,,0000,0000,0000,,below the original equilibrium.
Dialogue: 0,0:05:25.38,0:05:28.05,Default,,0000,0000,0000,,And of course, this economy\Nnow has a recessionary gap.
Dialogue: 0,0:05:28.05,0:05:31.53,Default,,0000,0000,0000,,We talked about recessionary\Ngaps in the previous video.
Dialogue: 0,0:05:31.53,0:05:33.24,Default,,0000,0000,0000,,So recessionary gaps can be caused
Dialogue: 0,0:05:33.24,0:05:34.65,Default,,0000,0000,0000,,by negative demand shock,
Dialogue: 0,0:05:34.65,0:05:37.92,Default,,0000,0000,0000,,inflationary gaps can be caused\Nby a positive demand shock.
Dialogue: 0,0:05:38.85,0:05:40.14,Default,,0000,0000,0000,,Alright, let's move on and talk about
Dialogue: 0,0:05:40.14,0:05:41.97,Default,,0000,0000,0000,,aggregate supply shocks.
Dialogue: 0,0:05:41.97,0:05:42.90,Default,,0000,0000,0000,,This time, we're gonna start
Dialogue: 0,0:05:42.90,0:05:45.03,Default,,0000,0000,0000,,with negative aggregate supply shocks.
Dialogue: 0,0:05:45.03,0:05:48.58,Default,,0000,0000,0000,,A negative aggregate supply shock
Dialogue: 0,0:05:49.53,0:05:51.55,Default,,0000,0000,0000,,occurs whenever there is an increase
Dialogue: 0,0:05:52.44,0:05:54.82,Default,,0000,0000,0000,,in the costs of production in a country
Dialogue: 0,0:05:55.80,0:05:59.46,Default,,0000,0000,0000,,which causes a decrease in\Nshort run aggregate supply.
Dialogue: 0,0:06:00.90,0:06:03.21,Default,,0000,0000,0000,,So assume, for example,\Nthere's an unexpected increase
Dialogue: 0,0:06:03.21,0:06:04.71,Default,,0000,0000,0000,,in energy prices.
Dialogue: 0,0:06:04.71,0:06:07.26,Default,,0000,0000,0000,,All businesses, no matter\Nwhat they're producing,
Dialogue: 0,0:06:07.26,0:06:08.85,Default,,0000,0000,0000,,depend on electricity.
Dialogue: 0,0:06:08.85,0:06:10.80,Default,,0000,0000,0000,,So if electricity prices go up,
Dialogue: 0,0:06:10.80,0:06:13.68,Default,,0000,0000,0000,,we would expect to see an inward shift
Dialogue: 0,0:06:13.68,0:06:15.63,Default,,0000,0000,0000,,of the short run aggregate supply curve
Dialogue: 0,0:06:16.98,0:06:20.07,Default,,0000,0000,0000,,as it costs more to produce\Nall goods and services.
Dialogue: 0,0:06:20.07,0:06:23.43,Default,,0000,0000,0000,,Now, if the price level were\Nto remain the same, at PLE,
Dialogue: 0,0:06:25.14,0:06:27.48,Default,,0000,0000,0000,,there would be shortages
Dialogue: 0,0:06:27.48,0:06:29.46,Default,,0000,0000,0000,,of goods and services in this country
Dialogue: 0,0:06:29.46,0:06:32.73,Default,,0000,0000,0000,,as the quantity of output\Nsupplied, I'll call that YS,
Dialogue: 0,0:06:32.73,0:06:35.91,Default,,0000,0000,0000,,is less than the quantity\Nof output demanded.
Dialogue: 0,0:06:35.91,0:06:40.02,Default,,0000,0000,0000,,This would represent a\Nshortage of goods and services.
Dialogue: 0,0:06:40.02,0:06:41.76,Default,,0000,0000,0000,,However, the economy should adjust
Dialogue: 0,0:06:41.76,0:06:43.56,Default,,0000,0000,0000,,to a new equilibrium price level
Dialogue: 0,0:06:43.56,0:06:44.94,Default,,0000,0000,0000,,and level of national output.
Dialogue: 0,0:06:44.94,0:06:48.30,Default,,0000,0000,0000,,And it does so by prices rising.
Dialogue: 0,0:06:48.30,0:06:50.70,Default,,0000,0000,0000,,We should see a new\Nequilibrium price level,
Dialogue: 0,0:06:50.70,0:06:53.10,Default,,0000,0000,0000,,which causes an increase\Nin the quantity supplied
Dialogue: 0,0:06:53.10,0:06:56.55,Default,,0000,0000,0000,,from what would occur at the\Noriginal price level of PLE,
Dialogue: 0,0:06:56.55,0:06:59.46,Default,,0000,0000,0000,,and a decrease in quantity\Nof output demanded,
Dialogue: 0,0:06:59.46,0:07:02.55,Default,,0000,0000,0000,,and we achieve a new equilibrium\Nat a higher price level.
Dialogue: 0,0:07:02.55,0:07:03.84,Default,,0000,0000,0000,,This is inflation,
Dialogue: 0,0:07:03.84,0:07:06.25,Default,,0000,0000,0000,,just like we saw in the\Npositive demand shock
Dialogue: 0,0:07:07.56,0:07:08.85,Default,,0000,0000,0000,,section of this video.
Dialogue: 0,0:07:08.85,0:07:10.86,Default,,0000,0000,0000,,However, this is not\Ndemand pull inflation.
Dialogue: 0,0:07:10.86,0:07:15.86,Default,,0000,0000,0000,,This type of inflation is what\Nwe call cost push inflation.
Dialogue: 0,0:07:16.32,0:07:20.10,Default,,0000,0000,0000,,Cost push inflation\Nresults from an increase
Dialogue: 0,0:07:20.10,0:07:22.32,Default,,0000,0000,0000,,in the costs of production in a country
Dialogue: 0,0:07:22.32,0:07:24.63,Default,,0000,0000,0000,,and a decrease in aggregate supply.
Dialogue: 0,0:07:24.63,0:07:27.48,Default,,0000,0000,0000,,This cost push inflation causes a decrease
Dialogue: 0,0:07:27.48,0:07:31.11,Default,,0000,0000,0000,,in national output, and we\Nhave a new equilibrium at YE1.
Dialogue: 0,0:07:32.70,0:07:35.43,Default,,0000,0000,0000,,Now we do have a recessionary\Ngap here as well.
Dialogue: 0,0:07:36.42,0:07:38.13,Default,,0000,0000,0000,,However, this recessionary\Ngap is not caused
Dialogue: 0,0:07:38.13,0:07:40.05,Default,,0000,0000,0000,,by decreasing demand\Nfor goods and services,
Dialogue: 0,0:07:40.05,0:07:42.12,Default,,0000,0000,0000,,rather decreasing supply.
Dialogue: 0,0:07:42.12,0:07:45.84,Default,,0000,0000,0000,,Now of course, there can\Nbe positive supply shocks,
Dialogue: 0,0:07:45.84,0:07:47.91,Default,,0000,0000,0000,,positive supply shock.
Dialogue: 0,0:07:47.91,0:07:51.63,Default,,0000,0000,0000,,This would be when\Naggregate supply increases
Dialogue: 0,0:07:51.63,0:07:55.65,Default,,0000,0000,0000,,due to falling costs of production.
Dialogue: 0,0:07:55.65,0:07:57.99,Default,,0000,0000,0000,,Assume for example, that the government
Dialogue: 0,0:07:57.99,0:08:01.02,Default,,0000,0000,0000,,enacts a massive policy of deregulation
Dialogue: 0,0:08:01.02,0:08:02.10,Default,,0000,0000,0000,,in the United States.
Dialogue: 0,0:08:02.10,0:08:04.29,Default,,0000,0000,0000,,Firms can now produce in the cheapest,
Dialogue: 0,0:08:04.29,0:08:07.65,Default,,0000,0000,0000,,most environmentally\Nharmful manner imaginable
Dialogue: 0,0:08:07.65,0:08:09.63,Default,,0000,0000,0000,,and as a result, at every price level,
Dialogue: 0,0:08:09.63,0:08:11.43,Default,,0000,0000,0000,,firms in the United States wish to produce
Dialogue: 0,0:08:11.43,0:08:13.32,Default,,0000,0000,0000,,a greater quantity of output.
Dialogue: 0,0:08:13.32,0:08:16.59,Default,,0000,0000,0000,,So we see an increase in\Nshort run aggregate supply
Dialogue: 0,0:08:16.59,0:08:18.48,Default,,0000,0000,0000,,to SRAS1.
Dialogue: 0,0:08:18.48,0:08:21.12,Default,,0000,0000,0000,,Assume once again that\Nthe price level remains
Dialogue: 0,0:08:21.12,0:08:22.74,Default,,0000,0000,0000,,at its original level of PLE.
Dialogue: 0,0:08:23.70,0:08:27.60,Default,,0000,0000,0000,,If the price level did not\Nfall following the increase
Dialogue: 0,0:08:27.60,0:08:29.04,Default,,0000,0000,0000,,in aggregate supply,
Dialogue: 0,0:08:29.04,0:08:32.37,Default,,0000,0000,0000,,we would have a quantity of\Noutput supplied, that's YS
Dialogue: 0,0:08:32.37,0:08:34.62,Default,,0000,0000,0000,,that is greater than the\Nquantity of output demanded,
Dialogue: 0,0:08:34.62,0:08:36.96,Default,,0000,0000,0000,,we would have surplus output.
Dialogue: 0,0:08:36.96,0:08:38.25,Default,,0000,0000,0000,,Just like in microeconomics,
Dialogue: 0,0:08:38.25,0:08:40.77,Default,,0000,0000,0000,,if there is a surplus\Nof goods being produced,
Dialogue: 0,0:08:40.77,0:08:42.27,Default,,0000,0000,0000,,the price must fall.
Dialogue: 0,0:08:42.27,0:08:45.00,Default,,0000,0000,0000,,In macro, the price level must fall.
Dialogue: 0,0:08:45.00,0:08:47.31,Default,,0000,0000,0000,,And as it does, households, firms,
Dialogue: 0,0:08:47.31,0:08:48.45,Default,,0000,0000,0000,,the government and foreigners will demand
Dialogue: 0,0:08:48.45,0:08:50.49,Default,,0000,0000,0000,,a greater quantity of output
Dialogue: 0,0:08:50.49,0:08:52.38,Default,,0000,0000,0000,,and will achieve a new equilibrium.
Dialogue: 0,0:08:52.38,0:08:57.00,Default,,0000,0000,0000,,So this is the new\Nequilibrium. Call that PL2.
Dialogue: 0,0:08:57.00,0:08:58.92,Default,,0000,0000,0000,,Here we see, once again, prices falling.
Dialogue: 0,0:08:58.92,0:09:00.22,Default,,0000,0000,0000,,This could be deflation
Dialogue: 0,0:09:01.56,0:09:03.18,Default,,0000,0000,0000,,or depending on the rate of inflation
Dialogue: 0,0:09:03.18,0:09:06.15,Default,,0000,0000,0000,,before the positive supply\Nshock, it could be disinflation,
Dialogue: 0,0:09:06.15,0:09:07.86,Default,,0000,0000,0000,,a lower inflation rate.
Dialogue: 0,0:09:09.90,0:09:13.23,Default,,0000,0000,0000,,And as price levels fall,\Nwe achieve a new equilibrium
Dialogue: 0,0:09:13.23,0:09:15.99,Default,,0000,0000,0000,,level of national output at YE1.
Dialogue: 0,0:09:18.33,0:09:20.10,Default,,0000,0000,0000,,Alright, we've just walked\Nthrough four different scenarios.
Dialogue: 0,0:09:20.10,0:09:21.66,Default,,0000,0000,0000,,We talked about a positive demand shock,
Dialogue: 0,0:09:21.66,0:09:23.73,Default,,0000,0000,0000,,which causes an increase\Nin aggregate demand,
Dialogue: 0,0:09:23.73,0:09:26.43,Default,,0000,0000,0000,,leading to demand pull inflation,
Dialogue: 0,0:09:26.43,0:09:29.55,Default,,0000,0000,0000,,and an increase in the\Nequilibrium level of output.
Dialogue: 0,0:09:29.55,0:09:31.32,Default,,0000,0000,0000,,We also talked about a\Nnegative demand shock,
Dialogue: 0,0:09:31.32,0:09:33.90,Default,,0000,0000,0000,,which causes disinflation or deflation,
Dialogue: 0,0:09:33.90,0:09:35.70,Default,,0000,0000,0000,,and a decrease in national output
Dialogue: 0,0:09:35.70,0:09:38.37,Default,,0000,0000,0000,,resulting in a recessionary gap.
Dialogue: 0,0:09:38.37,0:09:40.02,Default,,0000,0000,0000,,Next, we moved on to supply shocks.
Dialogue: 0,0:09:40.02,0:09:42.96,Default,,0000,0000,0000,,A negative supply shock caused\Nby an unexpected increase
Dialogue: 0,0:09:42.96,0:09:44.91,Default,,0000,0000,0000,,in the costs of production in a country
Dialogue: 0,0:09:44.91,0:09:46.95,Default,,0000,0000,0000,,causes cost push inflation.
Dialogue: 0,0:09:46.95,0:09:50.16,Default,,0000,0000,0000,,That's higher prices\Nand a recessionary gap
Dialogue: 0,0:09:50.16,0:09:52.50,Default,,0000,0000,0000,,as the equilibrium output\Nfalls in a country.
Dialogue: 0,0:09:52.50,0:09:54.00,Default,,0000,0000,0000,,A positive supply shock
Dialogue: 0,0:09:54.00,0:09:55.68,Default,,0000,0000,0000,,caused by something like deregulation
Dialogue: 0,0:09:55.68,0:09:57.96,Default,,0000,0000,0000,,or any other thing that\Ncauses the cost of production
Dialogue: 0,0:09:57.96,0:10:01.14,Default,,0000,0000,0000,,in the country to fall causes\Ndeflation or disinflation
Dialogue: 0,0:10:01.14,0:10:04.26,Default,,0000,0000,0000,,and an increase in the equilibrium\Nlevel of national output.
Dialogue: 0,0:10:04.26,0:10:06.66,Default,,0000,0000,0000,,So an increase in short\Naggregate supply is the best
Dialogue: 0,0:10:06.66,0:10:08.85,Default,,0000,0000,0000,,of the four scenarios we\Noutlined in this video
Dialogue: 0,0:10:08.85,0:10:09.68,Default,,0000,0000,0000,,for a country.
Dialogue: 0,0:10:09.68,0:10:11.58,Default,,0000,0000,0000,,It actually means that the\Ncountry is experiencing
Dialogue: 0,0:10:11.58,0:10:13.65,Default,,0000,0000,0000,,economic growth, increased output,
Dialogue: 0,0:10:13.65,0:10:15.78,Default,,0000,0000,0000,,and price level stability.
Dialogue: 0,0:10:15.78,0:10:17.22,Default,,0000,0000,0000,,In the next video, we're gonna talk about
Dialogue: 0,0:10:17.22,0:10:20.21,Default,,0000,0000,0000,,long run adjustments to a\Ncountry's aggregate output
Dialogue: 0,0:10:20.21,0:10:22.34,Default,,0000,0000,0000,,in the AD/AS model.
Dialogue: 0,0:10:22.34,0:10:23.94,Default,,0000,0000,0000,,(upbeat music)\NHere we go.