1 / 54

Chapter 19

Chapter 19 Aggregate Demand and Aggregate Supply Ch 19 Outline Business Cycle Aggregate Demand Curve (AD Curve) Aggregate Supply Curve (AS Curve) AD/AS Model Recession & Model Finishing Ch 16 Great! Two new kids on the block! Yeah. We introduce Chapter 19 You learn how the

Albert_Lan
Download Presentation

Chapter 19

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 19 Aggregate Demand and Aggregate Supply

  2. Ch 19 Outline • Business Cycle • Aggregate Demand Curve (AD Curve) • Aggregate Supply Curve (AS Curve) • AD/AS Model • Recession & Model

  3. Finishing Ch 16 Great! Two new kids on the block! Yeah. We introduce Chapter 19 You learn how the economy falls into rececession! Macro: Sink or swim? Think & Win!

  4. Short-Run Economic Fluctuations • Economic activity varies • Recession: drop in real GDP for two consecutive quarters.

  5. Three Key Facts About Economic Fluctuations • Economic Fluctuations are Unpredictable • Most Macro Variables Fluctuate Together • As Output Falls, Unemployment Rises

  6. Long-Run AS Curve Expand to Peak Real GDP GDP trend grows 3% per year Contract to trough Time

  7. Economic Fluctuations • Leading Economic Indicators (LEI) foreshadow changes • stock prices, • building permits, • initial unemployment insurance claims • money supply growth • length of average work-week

  8. Aggregate Demand (AD) & Aggregate Supply (AS) • Aggregate: means “Total” or “Sum of All” • Economists use the model of aggregate demand and aggregate supply.

  9. The Basic Model of Economic Fluctuations • Two variables used in AD/AS model to analyze the short-run fluctuations: 1. real GDP 2. overall price level (I.e., CPI)

  10. Aggregate Demand and Aggregate Supply • Aggregate Demand Curve shows quantity of goods and services demanded at different price levels.

  11. What Causes Movement On an AD Curve?

  12. Aggregate Demand Price Level AD = C + I + G + NX PE P2 Aggregate Demand Q2 QE Quantity of Output

  13. Aggregate Demand Curve • AD = C + I + G + NX • Why AD Slopes down: • Wealth Effect on Consumption (C) • Trade Effect on Net Exports (NX) • Interest Rate Effect on Investment (I)

  14. Downward Slope of AD • Wealth Effect: • Price Level (P) falls • People Feel Wealthier • Consumption (C) rises

  15. Downward Slope of AD • Trade Effect: • P falls • US goods now relatively cheap • US exports (NX) rise

  16. Downward Slope of AD Curve • Interest-Rate Effect: • P falls • Interest Rate Falls • Investment Increases

  17. Aggregate Demand Price Level AD = C + I + G + NX PE P2 Aggregate Demand Q2 QE Quantity of Output

  18. What Shifts AD?

  19. Shifts in AD Curve: AD Rises Price Level C, I, G, or NX rises AD Aggregate Demand Quantity of Output

  20. Factors that shift AD Curve Right • Consumers become optimistic (C) • Businesses become optimistic (I) • Foreigners buy US Goods (NX) • Congress Raises Gov’t Purchases (G) • The Fed buys Gov’t Securities (C, I)

  21. And these factors work in reverse

  22. Shifts in AD Curve: AD Falls Price Level C, I, G or NX Falls AD Aggregate Demand Quantity of Output

  23. Long-Run Aggregate Supply (AS) Curve • Long-Run Aggregate Supply Curve (LRAS) is vertical at full-employment GDP • LRAS depends on: • Resource Base • Technology • Natural Rate of Unemployment

  24. Long-Run AS Curve The Long-Run Aggregate Supply (LRAS) Curve Price Level When Expected Inflation = Actual Inflation, economy on LRAS Quantity of Output

  25. Long-Run AS Curve The Long-Run Aggregate Supply (LRAS) Curve Price Level Output level is what economy produces when unemployment at natural rate Quantity of Output

  26. Shifts in LRAS Curve • Over time, these shift LRAS right: • Greater Resource Base • Better Technology • Lower Natural Rate of Unemployment

  27. Long-Run AS Curve Price Level The Long-Run Aggregate Supply (LRAS) Curve Quantity of Output

  28. Short-Run Aggregate Supply CurveSlopes Upward Price Level SR Aggregate Supply (0%) Quantity of Output

  29. What Causes Movement On SR AS Curve?

  30. Short-Run Aggregate Supply (SRAS) Curve • In short run: • A rise in pricelevel • Raises economy’s output level • …and vice versa

  31. Why SR Aggregate Supply Curve Slopes • Keynesian Sticky-Wage Theory: • Wages fixed in short-run by contract • If inflation greater than expected, real wage falls • Profit margins widen • Firm’s expand output.

  32. Short-Run Aggregate Supply Curve Price Level Aggregate Supply (0%) P2=102 PN=100 Q2 QN Quantity of Output

  33. Short-Run Aggregate Supply Curve Price Level Aggregate Supply (0%) P2=102 PN=100 Q2 QN Quantity of Output

  34. What Shifts SR AS?

  35. Why SR AS Curve Shifts • Two reasons why SRAS shifts: • Changes in Inflationary Expectations • Change in resource prices (e.g., wage)

  36. SRAS Falls…Because Inflationary Expectations Rise &Workers Win Wage Hike AS(2%) Price Level Aggregate Supply AS(0%) Quantity of Output

  37. SRAS Rises…Inflationary Expectations Wage Rate or Resource Prices Fall AS (2%) Price Level Aggregate Supply AS (0%) Quantity of Output

  38. Equilibrium in the Long-Run LRAS Price Level SR Aggregate Supply (0%) PN Aggregate Demand QN Quantity of Output

  39. Sources of Recession • Two reasons: • AD falls (shifts left) • C, I, G or NX falls • AS falls (shifts left) Stagflation • Higher resource costs, • inflationary expectations

  40. A Decrease in Aggregate Demand Price Level Aggregate Supply (0%) PN Aggregate Demand QN Quantity of Output

  41. A Decrease in Aggregate Demand Price Level Aggregate Supply (0%) PN Aggregate Demand QN Quantity of Output

  42. A Decrease in Aggregate Demand Price Level Aggregate Supply (0%) PN P2 Aggregate Demand Q2 QN Quantity of Output

  43. Economy Adjusts to AD Drop SRAS (0%) Price Level SRAS (-5%) Economy Adjusts By Itself!!! Aggregate Demand PN QN Quantity of Output

  44. JM Keynes • When AD tanks, get Depression • Wages are “sticky” • Stuck in Depression • Need Gov’t to increase spending or Cut Taxes • AD rises • Output rises When Congress changes taxes (T) or government spending (G), this is called Fiscal Policy

  45. Two Ways For Gov’t To Increase AD • Congress can cut taxes or increase government purchases • The Fed can increase the money supply Fiscal Policy Monetary Policy

  46. Aggregate Demand Curve Falls Price Level Aggregate Supply Output at Full Employment Aggregate Demand Quantity of Output

  47. Government Spending Raises AD Price Level Aggregate Supply Aggregate Demand Quantity of Output

  48. Source of RecessionA Decrease in SR Aggregate Supply • OPEC energy price hike. • A fall in total output below full output • An increase in unemployment Roar

  49. A Decrease in Aggregate Supply Price Level Aggregate Supply PN Aggregate Demand QN Quantity of Output

  50. A Decrease in Aggregate Supply Aggregate Supply (2%) Price Level Aggregate Supply (0%) PN Aggregate Demand QN Quantity of Output

More Related