Chapter 24

We've just seen that the effect of a decrease in autonomous expenditure on real GDP is different in the short run and the long run. The bigger effect on real GDP occurs in the short run. In the long run, there is no effect on real GDP. Similar results are true for increases in autonomous expenditure: The larger effect occurs in the short run and there is no long-run effect. Hence we have an important result:

The effect of a change in autonomous expenditure on real GDP and the price level is important because it starts to show the power of the aggregate supply-aggregate demand fmodel. We'll use the aggregate supply-aggregate demand model a lot in upcoming chapters, so making sure that you have a firm understanding of how it is constructed and practicing with it now is time well spent. Fortunately, both the Economics in Action software and the Study Guide to accompany the textbook can help in both dimensions. In the Economics in Action you have returned to MacroMonitor and they make sure that you fully understand how equilibrium expenditure relates to aggregate demand. The hands-on exercises in this software can prove very valuable if you find this connection tough. In addition, the Study Guide's page of Helpful Hints may prove immensely useful. Then, test your grasp of this material by using True or False questions 19 to 22; Multiple Choice questions 19 and 20. For a solid understanding of this material be sure not to miss any of these questions.