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AGGREGATE MARKET SHOCKS: Disruptions of the equilibrium in the aggregate market (or AS-AD model) caused by shifts of the aggregate demand, short-run aggregate supply, or long-run aggregate supply curves. Shocks of the aggregate market are associated with, and thus used to analyze, assorted macroeconomic phenomena such as business cycles, unemployment, inflation, stabilization policies, and economic growth. The specific analysis of aggregate market shocks identifies changes in the price level (GDP price deflator) and real production (real GDP). However, changes in the price level and real production have direct implications for the unemployment rate, the inflation rate, national income, and a host of other macroeconomic measures.

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Lesson 16: Aggregate Shocks | Unit 3: Basic Shifts Page: 9 of 21

Topic: AD Decrease: Long Run <=PAGE BACK | PAGE NEXT=>

The long-run equilibrium is given by the intersection of the negatively-sloped AD curve and the vertical LRAS.
  • A decrease in AD results in a new long-run equilibrium.
  • At the new equilibrium, real production does not change, it stays at Qf. The price level decreases from Po to P2.
  • We're still missing a lot of short-run action that occurs as we go from one long-run equilibrium to another.

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ADVERSE SELECTION

An inefficient, bad, or adverse outcome of a market exchange that results because buyers and/or sellers make decisions based on asymmetric information. This commonly results in a market that exchanges a lesser quality good, what is termed the market for lemons. Two related problems resulting from asymmetric information are moral hazard and the principal-agent problem. Two methods of lessoning the problem of adverse selection are signalling and screening.

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BLACK DISMALAPOD
[What's This?]

Today, you are likely to spend a great deal of time at the confiscated property police auction hoping to buy either an ink cartridge for your printer or a rechargeable battery for your camera. Be on the lookout for empty parking spaces that appear to be near the entrance to a store.
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A half gallon milk jug holds about $50 in pennies.
"The vacuum created by failure to communicate will quickly be filled with rumor, misrepresentations, drivel and poison. "

-- C. Northcote Parkinson, historian

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Net Present Value
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