Download Shifts of the Short-Run Aggregate Supply Curve

Macroeconomics
CHAPTER 27
Aggregate Supply and Aggregate
Demand
Aggregate Supply
The aggregate supply curve shows the relationship
between the aggregate price level and the quantity of
aggregate output. It is upward sloping.
2
Shifts of the Short-Run Aggregate Supply Curve
3
Shifts of the Short-Run Aggregate Supply Curve
Changes in
commodity prices,
nominal wages
productivity
Expectations
lead to changes in producers’ profits and shift the shortrun aggregate supply curve.
4
Long-Run Aggregate Supply Curve
The long-run aggregate supply curve shows the
relationship between the aggregate price level and the
quantity of aggregate output supplied that would exist if
all prices, including nominal wages, were fully
flexible.
Let’s make this easy: Think of Long –run
aggregate supply as POTENTIAL output.
5
Long-Run Aggregate Supply Curve
6
Economic Growth Shifts the LRAS Curve
Rightward
7
From the Short Run to the Long Run
Leftward Shift of the Short-run Aggregate Supply Curve
8
From the Short Run to the Long Run
Rightward Shift of the Short-run Aggregate Supply Curve
9
Shifts of the Short-Run Aggregate Supply Curve
10
The Short-Run Aggregate Supply Curve
Three-segment AS curve
Keynesian
Classical
Intermediate range
11
Aggregate Demand
The aggregate demand curve shows the relationship
between the aggregate price level and the quantity of
aggregate output demanded by households, businesses,
and the government.
12
The Aggregate Demand Curve
13
Why Is the Aggregate Demand Curve DownwardSloping?
The wealth effect of a change in the aggregate
price level— higher prices reduce consumer spending.
The
interest rate effect of a change in aggregate
the price level—a higher aggregate price level
(inflation) leads to a rise in interest rates. Investment
spending and consumer spending fall. The opposite is
true also: lower interest rates will increase AD
The
net exports effect – Lower price level = more US
exports. AD and GDP increase
14
Shifts of the Aggregate Demand Curve
The aggregate demand curve shifts because of
Changes in expectations
Changes in wealth or interest rates
Changes in tax policy or money supply
Changes in C, G, I, X, or M
Policy makers can use fiscal policy and monetary
policy to shift the aggregate demand curve.
15
Shifts of the Aggregate Demand Curve –
Rightward Shift
16
Shifts of the Aggregate Demand Curve –
Leftward Shift
17
The Multiplier
The size of the multiplier is based on the marginal
propensity to consume. As disposable increases,
people only have two choices: Spend or save.
18
The Multiplier Effect Simplified

Spending Multiplier =
1
MPS
19
Total Increase in GDP from $50 Billion Rise in
GDP
20
The Multiplier
21
Tax Multiplier
Tax multiplier = MPC = MPC
1-MPC MPS
Less than the spending multiplier
because some of the 1st round of
spending is saved, not spent.
22
The AS–AD Model
The AS-AD model uses the aggregate supply curve and
the aggregate demand curve together to analyze
economic fluctuations.
23
The AS–AD Model
24
Short-Run Macroeconomic Equilibrium
The economy is in short-run macroeconomic
equilibrium when the quantity of aggregate output
supplied is equal to the quantity demanded.
The short-run equilibrium aggregate price level
is the aggregate price level in the short-run
macroeconomic equilibrium.
Short-run equilibrium aggregate output is the
quantity of aggregate output produced in the short-run
macroeconomic equilibrium.
25
Shifts of the SRAS Curve
Stagflation is the combination of inflation and
falling aggregate output.
26
Shifts of the SRAS Curve
27
Shifts of Aggregate Demand: Short-Run Effects
28
Shifts of Aggregate Demand: Short-Run Effects
29
Long-Run Macroeconomic Equilibrium
The economy is in long-run macroeconomic
equilibrium when the point of short-run
macroeconomic equilibrium is on the long-run aggregate
supply curve.
30
Long-Run Macroeconomic Equilibrium
31
The Short-Run / Long run Equilibrium
LRAS
SR / LR
Equilibrium
point
32
Short-Run Versus Long-Run Effects of a Negative
Demand Shock
Recessionary gap
33
Short-Run Versus Long-Run Effects of a Positive
Demand Shock
Inflationary gap
34
Self-correcting Mechanism
In the long run the economy is self correcting: shocks
to aggregate demand do not affect aggregate output in
the long run.
35
Negative Supply Shocks
Negative supply shocks pose a policy dilemma: a
policy that stabilizes aggregate output by increasing
aggregate demand will lead to inflation, but a policy that
stabilizes prices by reducing aggregate demand will
decrease output.
36
Macroeconomic Policy
The high cost—in terms of unemployment—of a
recessionary gap and the future adverse consequences
of an inflationary gap 
Active stabilization policy, using fiscal or monetary
policy to offset demand shocks:
Fiscal policy affects aggregate demand directly
through government purchases and indirectly
through changes in taxes or government transfers
that affect consumer spending.
Monetary policy affects aggregate demand
indirectly through changes in the interest rate that
affect consumer and investment spending.
37
The End of Chapter 27
38