Download Aggregate Demand and Aggregate Supply

12
Aggregate Demand and Aggregate
Supply
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Aggregate Demand
• Real GDP desired at each price level
• Inverse relationship
• Real balances effect
• Interest effect
• Foreign purchases effect
LO1
12-2
Price level
Aggregate Demand
AD
0
LO1
Real domestic output, GDP
12-3
Changes in Aggregate Demand
• Determinants of aggregate demand
• Shift factors affecting C, I, G, Xn
• 2 components involved
• Change in one of the determinants
• Multiplier effect
LO1
12-4
Price level
Changes in Aggregate Demand
AD2
AD3
AD1
0
Real domestic output, GDP
LO1
12-5
Consumer Spending
• Consumer wealth
• Household borrowing
• Consumer expectations
• Personal taxes
LO1
12-6
Investment Spending
• Real interest rates
• Expected returns
• Expectations about future business
conditions
• Technology
• Degree of excess capacity
• Business taxes
LO1
12-8
Government Spending
• Government spending increases
• Aggregate demand increases (as long
•
LO1
as interest rates and tax rates do not
change)
• More transportation projects
Government spending decreases
• Aggregate demand decreases
• Less military spending
12-9
Net Export Spending
• National income abroad
• Exchange rates
• Dollar depreciation
• Dollar appreciation
LO1
12-10
Aggregate Supply
• Total real output produced at each price
•
LO2
level
Relationship depends on time horizon
• Immediate short run
• Short run
• Long run
12-11
AS: Immediate Short Run
Price level
Immediate-short-run
aggregate supply
P1
0
ASISR
Qf
Real domestic output, GDP
LO2
12-12
Aggregate Supply: Short Run
AS
Price level
Aggregate supply
(short run)
0
Qf
Real domestic output, GDP
LO2
12-13
Aggregate Supply: Long Run
Price level
ASLR
Long-run
aggregate
supply
0
Qf
Real domestic output, GDP
LO2
12-14
Changes in Aggregate Supply
• Determinants of aggregate supply
• Shift factors
• Collectively position the AS curve
• Changes raise or lower per-unit
production costs
LO2
12-16
Changes in Aggregate Supply
AS3
AS1
Price level
AS2
0
Real domestic output, GDP
LO2
12-17
Input Prices
• Domestic resource prices
• Labor
• Capital
• Land
• Prices of imported resources
• Imported oil
• Exchange rates
LO2
12-18
Productivity
• Real output per unit of input
• Increases in productivity reduce costs
• Decreases in productivity increase costs
Productivity
=
Per-unit production cost
LO2
total output
total inputs
=
total input cost
total output
12-19
Legal-Institutional Environment
• Legal changes alter per-unit costs of
output
• Taxes and subsidies
• Extent of government regulation
LO2
12-20
Price level (index numbers)
Equilibrium
AS
100
a
92
b
Real Output
Demanded
(Billions)
Price Level
(Index Number)
Real Output
Supplied
(Billions)
$506
108
$513
508
104
512
510
100
510
512
96
507
514
92
502
AD
0
502
510 514
Real domestic output, GDP
(billions of dollars)
LO3
12-21
AD Increases: Demand-Pull Inflation
Price level
AS
P2
P1
AD2
AD1
0
Qf
Q1 Q2
Real domestic output, GDP
LO4
12-23
Decreases in AD: Recession
Price level
AS
P1
P2
b
a
c
AD1
AD2
0
Q1 Q2 Qf
Real domestic output, GDP
LO4
12-24
Decreases in AD: Recession
• Prices are downwardly inflexible
• Fear of price wars
• Menu costs
• Wage contracts
• Efficiency wages
• Minimum wage law
LO4
12-25
Decreases in AS: Cost-Push Inflation
Price level
AS2
AS1
b
P2
P1
a
AD
0
Q1 Qf
Real domestic output, GDP
LO4
12-26
Increases in AS: Full-Employment
Price level
AS1
P3
P2
P1
AS2
b
c
a
AD2
AD1
0
Q1
Q2 Q3
Real domestic output, GDP
LO4
12-27
Impact of Oil Prices Diminished?
• 1970’s
• Reduced AS and negative GDP gap
• Cost-push inflation
• Rising unemployment
• 2000’s
• Core inflation steady
• Use 50% less oil and gas today
• Federal Reserve more vigilant
12-29
Derivation of Aggregate Demand
AE1 (at P1 )
AE2 (at P2 )
AE3 (at P3 )
Aggregate Expenditures
(billions of dollars)
1
2
3
LO1
LO1
LO1
Price Level
45°
3
P3
2
P2
1
AD
P1
Q3
Q2
Q1
Real Domestic Product, GDP
LO5
12A-30