Economic Stabilization Policy

1. Economic Stabilization Policy

2. Macroeconomic Equilibrium Macroeconomics seeks balance through supply and demand.

3. Aggregate Supply and Demand • Supply and demand tools help determine equilibrium price and quantity of output • Aggregate supply assumes money supply is fixed and that a given price level prevails. • If price changes, individual firms respond by adjusting their output. • After many price changes, an aggregate supply curve can be constructed. • Price level includes the price of everything produced in the economy. • Real GDP—value of all goods and services produced

4. Aggregate Supply and Demand Equation of Aggregate Supply Aggregate Supply = the sum of the GOODS and SERVICES provided in an economy. (One way to measure GDP)

5. Aggregate Supply and Demand • Changes in aggregate supply: • INCREASE in the size and/or quality of labor force results in a INCREASE in aggregate supply • DECREASE in the size and/or quality of labor force results in a DECREASE in aggregate supply

6. Aggregate Supply and Demand • Changes in aggregate supply: • INCREASE in the size and/or quality of capital stock results in a INCREASE in aggregate supply • DECREASE in the size and/or quality of capital stock results in a DECREASE in aggregate supply

7. Aggregate Supply and Demand • Changes in aggregate supply: • Technological progress results in a RISE in Aggregate Supply, • INCREASE in the factor productivity of labor and landresults in an INCREASE in Aggregate Supply • DECREASE in the factor productivity of labor and land results in an DECREASE in Aggregate Supply

8. Aggregate Supply and Demand INCREASE in the Wage Costs per Unit of Output results in a DECREASE in Aggregate Supply DECREASE in the Wage Costs per Unit of Output results in a INCREASE in Aggregate Supply Inflation Expectations

9. Aggregate Supply and Demand An INCREASE in Producer Taxes results in a DECREASE in Aggregate Supply A DECREASE in Producer Taxes results in an INCREASE in Aggregate Supply An INCREASE in Producer Subsidies results in an INCREASE in Aggregate Supply A DECREASE in Producer Subsidies results in a DECREASE in Aggregate Supply

10. Aggregate Supply and Demand

11. Aggregate Supply and Demand Aggregate demand is the total of all demand in the economy. Aggregate Demand = C + I + G + NX (Is this familiar?) The aggregate demand curve shows the amount of total output purchased at every price level

12. Aggregate Supply and Demand • Changes in aggregate demand • An increase in C, I, G, or NX will result in an INCREASE in Demand. (Shift to the right) • A decrease in C, I, G, or NX will result in an DECREASE in Demand. (Shift to the left)

13. Aggregate Supply and Demand

14. Macroeconomic Equilibrium Aggregate supply and demand curves provide a framework to help analyze the impact of economic policy proposals on economic growth and price stability. Macroeconomic equilibrium is the point at which the level of real GDP is consistent with a given price level The equilibrium will change if either AS or AD changes.

15. Macroeconomic Equilibrium

16. Macroeconomic Equilibrium