Page 230 - Krugmans Economics for AP Text Book_Neat

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Prices and Output During the Great Depression
The figure shows the actual track of the ag- you can see, aggregate output and the aggre- This is what we’d expect to see if the economy
gregate price level, as measured by the GDP gate price level fell together from 1929 to were moving down the short -run aggregate
deflator, and real GDP, from 1929 to 1942. As 1933 and rose together from 1933 to 1937. supply curve from 1929 to 1933 and moving
up it (with a brief reversal in 1937–1938)
thereafter.
Aggregate
price level But even in 1942 the aggregate price level
(GDP deflator, was still lower than it was in 1929; yet real GDP
2005 = 100)
was much higher. What happened?
11
1929 The answer is that the short -run aggregate
supply curve shifted to the right over time.
1930 1942
10 This shift partly reflected rising productivity—
a rightward shift of the underlying long -run
1931 1937 aggregate supply curve. But since the U.S.
9 1939 1941 economy was producing below potential out-
1938 put and had high unemployment during this
1940
1932 1936 period, the rightward shift of the short -run ag-
8 1935
1934 gregate supply curve also reflected the adjust-
1933
ment process shown in panel (b) of Figure
18.5. So the movement of aggregate output
0 800 1,000 1,200 1,400 1,600 from 1929 to 1942 reflected both movements
Real GDP along and shifts of the short -run aggregate
(billions of 2005 dollars) supply curve.

Module 18 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Determine the effect on short -run aggregate supply of each of 2. Suppose the economy is initially at potential output and the
the following events. Explain whether it represents a movement quantity of aggregate output supplied increases. What
along the SRAS curve or a shift of the SRAS curve. information would you need to determine whether this was
a. A rise in the consumer price index (CPI) leads producers to due to a movement along the SRAS curve or a shift of the
increase output. LRAS curve?
b. A fall in the price of oil leads producers to increase output.
c. A rise in legally mandated retirement benefits paid to
workers leads producers to reduce output.

Tackle the Test: Multiple-Choice Questions
1. Which of the following will shift the short-run aggregate supply c. nominal wages.
curve? A change in d. productivity.
a. profit per unit at any given price level. e. all of the above
b. commodity prices.

188 section 4 National Income and Price Determination