00:01
So here we're asked to apply the adas model, right? first things first, adas is a story about real output and prices.
00:08
Aggregate demand slopes down, aggregate supply slopes up.
00:12
My aggregate demand is my consumption, my government, my investment, and my debt exports.
00:19
And the way that i usually explain as is that it's firm's business models, right? prices, wages, costs, everything that goes into the business model of a firm is on aggregate supply, whereas aggregate demand is the amount of stuff that people want to buy.
00:42
So here, our example, is an input good is cheaper.
00:50
Well, this is obviously an aggregate supply shock, right? it doesn't affect, right? if someone told you that, like, i don't know, the price of steel pipe had gone down, the price of steel pipe going down does not change your consumption.
01:06
Doesn't change what the government is doing.
01:08
Doesn't change necessarily our exports, but we have to be very careful here, right? what i'm going to say for sure is that it definitely makes the aggregate supply go down, right? this thing is going to be, you know, used in production.
01:31
And now when this input good is cheaper, firms can supply the same amount of real output for less, right? for less.
01:41
So aggregate supply goes down.
01:44
And that would move us from the original equilibrium with prices and output, right, into a short -run equilibrium.
01:54
Where income is increasing and prices are falling...