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Video transcript

in the last few videos we explore in a situation where the aggregate demand curve shifted to the right and that caused inflation and that's actually called demand pull inflation what I want to do in this video is study situation where the aggregate the short-run aggregate supply curve shifts to the left and that causes inflation and that's called cost-push inflation cost cost push inflation cost push inflation so let's just start off with our standard our standard graph so this is aggregate prices this is real aggregate productivity real GDP right over here and I'm gonna focus things on the short-run aggregate demand right over here that is our aggregate demand curve and then our aggregate supply aggregate supply in the short-run this is what we're gonna focus on might look something like that so this is aggregate supply in the short-run and this is our current level this is our current level of prices and the reason why I draw aggregate supply in the short-run having this kind of this curve that keeps getting steeper and steeper if you think in algebraic terms the slope gets larger and larger as you go to the right one way to think about it if the real GDP is down here maybe performing well below its potential there's a lot of excess capacity in the economy excess labor capacity acts excess factory capacity and then if you so if you want more productivity out of that economy people aren't going to demand much more prices won't have to go up more there's a lot of slack in the economy well as GDP gets higher and higher maybe even going beyond its potential starts to get overheated in order for people to get to very very high levels of utilization or essentially get more people to enter into the labor market or work longer hours work overtime the prices are essentially going to have to go up so over here for an increment for some increment in GDP prices don't have to go up so much so you have a lower slope then say over here for that same increment in GDP prices have to go up dramatically now with that out of the way let's think about what would happen if the aggregate supply curve were to shift to the left and we could also think about why would it shift to the left so let's first just shift it to the left so let's just shift it to the left it might look something like that so at any given point I just tried to shift to the left and you see a new aggregate you see a new equilibrium price and equilibrium GDP this was the old equilibrium price and the old equilibrium real GDP this is the new equilibrium price and the new equilibrium real GDP and you see you definitely had inflation price went up but this is worse than ourn depending on how you view things but in general this is worse than the demand pull inflation because at least with the demand pull inflation we saw that over here you had inflation happening but GDP real GDP increased even more it started to get overheated but over here you have the other way around prices went up prices went up but your gdp actually contracts and this is a situation that you might you might have heard the firt word before this is stagflation inflation with stagnation so this is stag stagflation and there's two very notable examples of this in recent US history in 1973 you had the night the Arab oil embargo it was apparently due and to respond to respond to us support of Israel in the Yom Kippur War so you had the 1973 oil embargo embargo and in 1979 1979 you have your revolution in Iran Iran was a major oil producer then continues to be but it was even more significant in 1979 and so during all the chaos during the revolution Iran's oil productivity dropped dramatically and so you also had so you had an oil crisis and the reason why oil crises would shift the cost would shift would shift the curve to the left oil crisis so in both of these situations the supply of oil drops dramatically and so if the supply of oil and this is kind of a might a micro phenomenon if the supply of something drops dramatically the price the price of that thing is going to go up dramatically and the 70s oil was even a bigger part of the US economy than it is now you probably remember if you were around in the 70s very very large cars that had very bad gas mileage and other uses of oil were also much much less efficient in the 1970s so it was a big input into the US economy and if all of a sudden major input if a major inputs price start it becomes much much more expensive then for you could view it one of two ways for a given level of productivity people will suppliers will want to charge more if you want me to deliver this to your house if you want me to run your truck so for a given level of productivity suppliers would charge more so you could view it like that or you could view at at a given at a given level of price suppliers will want to produce less so at a given price so let's say this price right over here a supplier would want to produce less because they're not getting as much real profit and so you could view it as a shift to the left or you could even view it if you say at a given level of productivity if you want me to produce that level you're gonna have to pay me more to offset my price increases so you could also view it as a shift up either one but we'll think of it as a shift left in this context and so you see this does describe what happened to during these two oil crises in the 1970s because of this increase in the price of oil at any given price suppliers were willing to supply left a grits short-run aggregate supply shifts to the left you have the inflation and you also have the stagnation real GDP goes down
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