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Aggregate Demand

Aggregate Demand. Macro – Unit 3 – part 1. In the last unit we studied the 3 macroeconomic goals of an economy. growth full employment (3) price stability.

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Aggregate Demand

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  1. Aggregate Demand Macro – Unit 3 – part 1

  2. In the last unit we studied the 3 macroeconomic goals of an economy... • growth • full employment • (3) price stability In this unit we’ll look at the macroeconomic tools a government may use to manipulate these goals, and whether a gov’t should use those tools.

  3. Prior to the 1930’s our government’s view of the economy was a classical view – laissez-faire – leave the economy alone and it will correct itself in the long-run. www.bergen.org/AAST/Projects/depression/images/soup.jpg http://www.iaction.com/exemplar/media/motherchildrendl1.jpg http://www.pbs.org/wnet/ Then in the 1930’s....

  4. http://www.adeptis.ru/vinci/john_maynard_keynes5.jpg In steps.... John Maynard Keynes, author of ... The General Theory of Employment, Interest & Money Keynesian economics provided a view that we should focus on the short run because, “In the long run, ____________________.” we’re all dead

  5. http://www.adeptis.ru/vinci/john_maynard_keynes5.jpg Based on Keynes’ ideas, two economic models arose. The 1st is .. AS / AD model Aggregate supply / aggregate demand model This model is used to explain short-run fluctuations in output and price level. The 2nd model is the multiplier model we’ll learn in 3 classes.

  6. AS / AD Model PL Price Level of all goods Q=aggregate output of entire economy... ...which is the definition of real GDP ... Y = income. Why is Y = GDP? b/c you can measure the economy by the __________ method (NI) or the ____________ method (GDP) income expenditures Q=realGDP=Y

  7. Aggregate Demand downward sloping Aggregate Demand is ______________. PL If the price level falls from PL1 to PL2 ...what happens? PL1 What is aggregate demand comprised of...what’s the formula? PL2 AD = C + I + G + (X-M) Q=realGDP=Y Q1 Q2

  8. Aggregate Demand Why is aggregate Demand downward-sloping? PL -1- Wealth Effect -- If the price level falls then you have more ___________ to spend, so you buy __________ stuff. PL1 money more PL2 AD Q=realGDP=Y Q1 Q2

  9. Aggregate Demand Why is aggregate Demand downward-sloping? -2- Interest Rate Effect – As price level falls  increase real ________ on hand called “money balances”  banks have more money to ______ out  interest rate falls  firms will increase ____________ expenditures. PL money loan PL1 investment PL2 AD Q=realGDP=Y Q1 Q2

  10. Aggregate Demand Why is aggregate Demand downward-sloping? -3- International Effect – As price level falls and exchange rates stay the same  foreign goods are relatively more ________ and domestic goods are relatively less ___________ increasing the demand for U.S. ___________. PL expensive PL1 expensive exports PL2 AD Q=realGDP=Y Q1 Q2

  11. Aggregate Demand Why is aggregate Demand downward-sloping? -4- Multiplier Effect –The initial changes have repercussions that amplify the initial changes. Price level falls increasing exports  U.S. firms increase production hiring more _________  more workers have more wealth to increase _________ and ________ and the cycle continues. PL PL1 workers consumption PL2 savings AD Q=realGDP=Y Q1 Q2

  12. Aggregate Demand A change in price level will cause movement _________ the AD curve. The AD curve can also shift right or left depending on certain variables. along An increase in aggregate demand  shift right An decrease in aggregate demand  shift left PL AD1 AD AD2 Q=realGDP=Y

  13. Variables that shift-- Aggregate Demand C S avings onsumption I T nvestment axes G MS overnment Spending Money Supply (X - M) M Net Exports Mutliplier

  14. Variables that shift the variables that shift-- Aggregate Demand An initial change is amplified by subsequent repercussions. M Multiplier Effect The U.S. dollar is strong against the Euro & Yen  U.S. exports to ________ and imports to ________ causing AD to shift _________  decrease increase decrease left U.S. firms __________ production and workers decreases layoff __________  consumption _________ causing AD to shift _________ again left decrease  U.S. firms __________ left investment causing AD to shift _________ again  and so forth until the decreases become negligible.

  15. AP workbook Act. 23, p. 123-125 15 min the end

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