Ten Principles of Economics - Part 70. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 31 AGGREGATE DEMAND AND AGGREGATE SUPPLY 715 be viewed as decreasing the quantity of goods and services supplied and shifting the long-run aggregate-supply curve to the left. A NEW WAY TO DEPICT LONG-RUN GROWTH AND INFLATION Having introduced the economy s aggregate-demand curve and the long-run aggregate-supply curve we now have a new way to describe the economy s long-run trends. Figure 31-5 illustrates the changes that occur in the economy from decade to decade. Notice that both curves are shifting. Although there are many forces that govern the economy in the long run and can in principle cause such shifts the two most important in practice are technology and monetary policy. Technological progress enhances the economy s ability to produce goods and services and this continually shifts the long-run aggregate-supply curve to the right. At the same time because the Fed increases the money supply over time the aggregate-demand curve also shifts to the right. As the figure illustrates the result is trend growth in output as shown by increasing Y and continuing inflation as shown by increasing P . This is just another way of representing the classical analysis of growth and inflation we conducted in Chapters 24 and 28. The purpose of developing the model of aggregate demand and aggregate supply however is not to dress our long-run conclusions in new clothing. Instead 2. . . . and growth in the Long-run money supply shifts aggregate Figure 31-5 Long-Run Growth and Inflation in the Model of Aggregate Demand and Aggregate Supply. As the economy becomes better able to produce goods and services over time primarily because of technological progress the long-run aggregate-supply curve shifts to the right. At the same time as the Fed increases the money supply the aggregate-demand curve also shifts to the right. In this figure output grows from Y1980 to Y1990 and then to Y2000 and the price level rises from P1980 to P1990 and then to P2000. Thus the model of .
