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Why the AD Curve Might Shift

CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY. Monetary Policy and Aggregate Demand. To achieve macroeconomic goals, the Fed can use monetary policy to shift the AD curve. The Fed's policy instrument is the money supply. The news often reports that the Fed targets the interest rate. mor

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Why the AD Curve Might Shift

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    1. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY Why the AD Curve Might Shift Any event that changes C, I, G, or NX – except a change in P – will shift the AD curve. Example: A stock market boom makes households feel wealthier, C rises, the AD curve shifts right.

    2. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY Monetary Policy and Aggregate Demand To achieve macroeconomic goals, the Fed can use monetary policy to shift the AD curve. The Fed’s policy instrument is the money supply. The news often reports that the Fed targets the interest rate. more precisely, the federal funds rate – which banks charge each other on short-term loans

    3. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY Fiscal Policy and Aggregate Demand Fiscal policy: the setting of the level of govt spending and taxation by govt policymakers Expansionary fiscal policy an increase in G and/or decrease in T shifts AD right Contractionary fiscal policy a decrease in G and/or increase in T shifts AD left

    4. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY AD Shifts Arising from Changes in NX A boom overseas increases foreign demand for our exports: NX rises, AD shifts right International speculators cause exchange rate to appreciate: NX falls, AD shifts left

    5. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY The Aggregate-Supply (AS) Curves The AS curve shows the total quantity of g&s firms produce and sell at any given price level. The slope of the AS curve depends on the time horizon: In the short run, the aggregate supply curve is upward-sloping. (Hence the upward-sloping curve labeled “SRAS” – “SR” stands for “short run”). In the long run, the aggregate supply curve is vertical. These slopes will be explained in the following slides. The slope of the AS curve depends on the time horizon: In the short run, the aggregate supply curve is upward-sloping. (Hence the upward-sloping curve labeled “SRAS” – “SR” stands for “short run”). In the long run, the aggregate supply curve is vertical. These slopes will be explained in the following slides.

    6. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY Why the LRAS Curve Might Shift The rightward shift of LRAS curve determines the long-run growth trend of real GDP.

    7. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY LRAS Shifts Arising from Changes in Physical, Human Capital or Technology Investment in factories or equipment rises: LRAS shifts right More people get college degrees: Human capital rises, LRAS shifts right Technological advances allow more output to be produced from a given bundle of inputs: LRAS shifts right.

    8. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY Using AD & AS to Depict LR Growth and Inflation Over the long run, tech. progress shifts LRAS to the right In the following chapter, it will be more clear why money supply growth shifts the AD curve rightward. In the following chapter, it will be more clear why money supply growth shifts the AD curve rightward.

    9. CHAPTER 15,16 AGGREGATE DEMAND AND AGGREGATE SUPPLY Short Run Aggregate Supply (SRAS) The SRAS curve is upward sloping: Over the period of 1-2 years, an increase in P

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