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Homework Chapters 11-12

Homework Chapters 11-12. Chapter 11 - Bonus - Friday January 27. Chapter 12 - Bonus – Wednesday, February 1. Tentative Test Day Friday, February 3rd. Hold on here we go!!!. Homework Chapters 9-10-11-12. Test Day - Next Friday Approximate number of questions per chapter.

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Homework Chapters 11-12

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  1. Homework Chapters 11-12 • Chapter 11 - Bonus - Friday January 27. • Chapter 12 - Bonus – Wednesday, February 1. • Tentative Test Day Friday, February 3rd. • Hold on here we go!!!

  2. Homework Chapters 9-10-11-12 • Test Day - Next Friday • Approximate number of questions per chapter. • Chapter 9 – 10 Questions • Keynesian Cross, MPC, Savings + Consumption = DI • Chapter 10 – 10 Questions • Simplified, Tax, and Balanced Budget Multipliers • Chapter 11 – 25 Questions • AD, AS, LRAS • Chapter 12 – 15 Questions • Fiscal Policy: Expansion, Contraction, Automatic, & Discretionary

  3. CHAPTERELEVEN Aggregate Demand And Aggregate Supply

  4. Aggregate Demand: ...the various amounts of goods and services - the amounts of real output - that domestic consumers, businesses and foreign buyers collectively desire to purchase at each possible price level

  5. Aggregate Demand: ...is downsloping because of:

  6. Aggregate Demand: ...is downsloping because of: 1 - Wealth Effect (Real Balances) A higher price level reduces the purchasing power of the general public’s financial assets. Remember the arbitrary and capricious nature of inflation??? That one was for you Sean!

  7. Aggregate Demand: ...is downsloping because of: 1 - Wealth Effect (Real Balances) 2 - Interest-Rate Effect When the supply of money is fixed, as price levels rise interest rates increase because as the demand for $ increases the price paid for its use also increases.

  8. Aggregate Demand: ...is downsloping because of: 1 - Wealth Effect (Real Balances) 2 - Interest-Rate Effect 3 - Foreign Purchases Effect As prices go up in the U.S, our goods become more expensive, Thus reducing the amount of exports and increasing imports.

  9. Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 1 Aggregate expenditures (billions of dollars) Real GDP at price level 1 0 GDP1 Price level 1’ P1 0 GDP1

  10. Deriving the Aggregate Demand Curve What if prices go up? (C a + I g + X n + G) 1 at P 1 1 Aggregate expenditures (billions of dollars) Real GDP at price level 1 0 GDP1 Price level 1’ P1 0 GDP1

  11. Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 1 (C a + I g + X n + G) 2 at P 2 Aggregate expenditures (billions of dollars) 2 A Lower Real GDP Exists at price level 2 0 GDP1 GDP2 2’ Price level P2 1’ P1 0 GDP1 GDP2

  12. Deriving the Aggregate Demand Curve What if prices go up again? (C a + I g + X n + G) 1 at P 1 1 (C a + I g + X n + G) 2 at P 2 Aggregate expenditures (billions of dollars) 2 A Lower Real GDP Exists at price level 2 0 GDP1 GDP2 2’ Price level P2 1’ P1 0 GDP1 GDP2

  13. Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 1 (C a + I g + X n + G) 2 at P 2 (C a + I g + X n + G) 3 at P 3 Aggregate expenditures (billions of dollars) 2 3 A Still Lower Real GDP Level Exists at price level 3 0 GDP1 GDP2 3’ P3 2’ Price level P2 1’ P1 0 GDP1 GDP2

  14. Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 1 (C a + I g + X n + G) 2 at P 2 (C a + I g + X n + G) 3 at P 3 Aggregate expenditures (billions of dollars) 2 3 0 GDP1 GDP2 3’ P3 The Aggregate Demand Can Be Constructed 2’ Price level P2 1’ P1 0 GDP1 GDP2

  15. Deriving the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 1 (C a + I g + X n + G) 2 at P 2 (C a + I g + X n + G) 3 at P 3 Aggregate expenditures (billions of dollars) 2 3 0 GDP1 GDP2 3’ P3 The Aggregate Demand Can Be Constructed 2’ Price level P2 1’ P1 0 GDP1 GDP2

  16. CHANGES IN AGGREGATE DEMAND AD Can increase... Price level AD1 0 Real domestic output, GDP

  17. CHANGES IN AGGREGATE DEMAND Price level AD2 AD1 0 Real domestic output, GDP

  18. CHANGES IN AGGREGATE DEMAND AD Can decrease... Price level AD2 AD1 0 Real domestic output, GDP

  19. CHANGES IN AGGREGATE DEMAND Price level AD2 AD1 AD3 0 Real domestic output, GDP

  20. DETERMINANTS OF AGGREGATE DEMAND

  21. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending

  22. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth

  23. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations

  24. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness

  25. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes

  26. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending

  27. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending • Interest rates

  28. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending • Interest rates • Profit expectations on investment projects

  29. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending • Interest rates • Profit expectations on investment projects • Technology

  30. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer wealth • Consumer expectations • Consumer indebtedness • Taxes Change in Investment Spending • Interest rates • Profit expectations on investment projects • Technology • Degree of excess capacity – Inventory!

  31. DETERMINANTS OF AGGREGATE DEMAND Change in Government Spending

  32. DETERMINANTS OF AGGREGATE DEMAND Change in Government Spending Change in Net Export Spending

  33. DETERMINANTS OF AGGREGATE DEMAND Change in Government Spending Change in Net Export Spending • National income abroad

  34. DETERMINANTS OF AGGREGATE DEMAND Change in Government Spending Change in Net Export Spending • National income abroad • Exchange rates illustrated...

  35. Changes in the Aggregate Demand Curve (C a + I g + X n + G) 1 at P 1 Aggregate expenditures (billions of dollars) An Increase in Aggregate Expenditures 0 GDP1 Price level An Increase in Aggregate Demand P1 AD1 0 GDP1

  36. Changes in the Aggregate Demand Curve (C a + I g + X n + G) 2 at P 1 (C a + I g + X n + G) 1 at P 1 Aggregate expenditures (billions of dollars) An Increase in Aggregate Expenditures 0 GDP1 GDP2 Price level An Increase in Aggregate Demand P1 AD2 AD1 0 GDP1 GDP2

  37. Aggregate Supply: ...the level of real domestic output which will be produced at each price level

  38. Aggregate Supply: ...has three ranges:

  39. Aggregate Supply: ...has three ranges: 1 - Horizontal Range

  40. Aggregate Supply: ...has three ranges: 1 - Horizontal Range 2 - Vertical Range

  41. Aggregate Supply: ...has three ranges: 1 - Horizontal Range 2 - Vertical Range 3 - Intermediate (Upsloping) Range

  42. As developed in chapter 8... P Vertical Range Horizontal Range Price level Upsloping or Intermediate Range Q Real domestic output, GDP

  43. An Increase in Aggregate Supply P AS1 Price level Q Real domestic output, GDP

  44. An Increase in Aggregate Supply P AS2 AS1 Price level Q Real domestic output, GDP

  45. A Decrease in Aggregate Supply P AS2 AS1 Price level Q Real domestic output, GDP

  46. A Decrease in Aggregate Supply P AS2 AS3 AS1 Price level Q Real domestic output, GDP

  47. DETERMINANTS OF AGGREGATE SUPPLY When per unit production costs change firms will alter the amount they produce at each level. What would cause the per unit production costs to change?

  48. DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices

  49. DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability

  50. DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices • Domestic resource availability • Land

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