Download Aggregate Demand and Aggregate Supply

Chapter 30
Aggregate Demand and Aggregate
Supply
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Aggregate Demand
• Real GDP desired at each price level
• Inverse relationship
• Real balances effect
• Interest effect
• Foreign purchases effect
LO1
30-2
Price level
Aggregate Demand
AD
0
LO1
Real domestic output, GDP
30-3
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
LO2
30-4
Price level
Changes in Aggregate Demand
AD2
AD3
AD1
0
Real domestic output, GDP
LO2
30-5
Consumer Spending
•
•
•
•
LO2
Consumer wealth
Household borrowing
Consumer expectations
Personal taxes
30-6
Investment Spending
• Real interest rates
• Expected returns
• Expectations about future business
conditions
• Technology
• Degree of excess capacity
• Business taxes
LO2
30-7
Government Spending
• Government spending increases
• Aggregate demand increases (as long as
interest rates and tax rates do not change)
• More transportation projects
• Government spending decreases
• Aggregate demand decreases
• Less military spending
LO2
30-8
Net Export Spending
• National income abroad
• Exchange rates
• Dollar depreciation
• Dollar appreciation
LO2
30-9
Aggregate Supply
• Total real output produced at each price level
• Relationship depends on time horizon
• Immediate short run
• Short run
• Long run
LO3
30-10
AS: Immediate Short Run
Price level
Immediate-short-run
aggregate supply
P1
0
ASISR
Qf
Real domestic output, GDP
LO3
30-11
Aggregate Supply: Short Run
AS
Price level
Aggregate supply
(short run)
0
Qf
Real domestic output, GDP
LO3
30-12
Aggregate Supply: Long Run
Price level
ASLR
Long-run
aggregate
supply
0
Qf
Real domestic output, GDP
LO3
30-13
Changes in Aggregate Supply
• Determinants of aggregate supply
• Shift factors
• Collectively position the AS curve
• Changes raise or lower per-unit production
costs
LO4
30-14
Changes in Aggregate Supply
AS3
AS1
Price level
AS2
0
Real domestic output, GDP
30-15
LO4
Input Prices
• Domestic resource prices
• Labor
• Capital
• Land
• Prices of imported resources
• Imported oil
• Exchange rates
LO4
30-16
Productivity
• Real output per unit of input
• Increases in productivity reduce costs
• Decreases in productivity increase costs
Productivity
=
Per-unit production cost
LO4
total output
total inputs
=
total input cost
total output
30-17
Legal-Institutional Environment
• Legal changes alter per-unit costs of output
• Taxes and subsidies
• Extent of government regulation
LO4
30-18
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)
LO5
30-19
Changes in Equilibrium
Price level
AS
P2
P1
AD2
AD1
0
Qf
Q1 Q2
Real domestic output, GDP
LO6
30-20
Decreases in AD: Recession
Price level
AS
P1
P2
b
a
c
AD1
AD2
0
LO6
Q1 Q2 Qf
Real domestic output, GDP
30-21
Decreases in AD: Recession
• Prices are downwardly inflexible
• Fear of price wars
• Menu costs
• Wage contracts
• Efficiency wages
• Minimum wage law
LO6
30-22
Decreases in AS: Cost-Push Inflation
Price level
AS2
AS1
b
P2
P1
a
AD
0
LO6
Q1 Qf
Real domestic output, GDP
30-23
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
LO6
30-24
Stimulus and the Great Recession
• Housing collapse triggers bank failures which
leads to recession
• Federal Reserve intervenes
• Lowers short-term interest rates
• Federal Government begins largest
peacetime program of spending
30-25
Stimulus and the Great Recession
•
•
•
•
•
GDP growth has been disappointing
High debt load due to low interest rates
High rate of savings
Unequal impact
Price increases rather than output gains
30-26