Download Chapter 11 Aggregate Demand & Aggregate Supply

Homework Chapters 11-12
Key concepts chapters 9 – 12!

Chapter 11 - Bonus - Friday
January 27.

Chapter 12 - Bonus –
Wednesday, February 1.

Tentative Test Day Friday,
February 3rd.

Hold on here we go!!!
Homework Chapters 9-10-11-12

Test Day - Next Friday

Approximate number of questions per chapter.

Chapter 9 – 10 Questions
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Chapter 10 – 10 Questions
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AD, AS, LRAS
Chapter 12 – 15 Questions

Key concepts chapters 9 – 12!
Simplified, Tax, and Balanced Budget
Multipliers
Chapter 11 – 25 Questions
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Keynesian Cross, MPC, Savings +
Consumption = DI
Fiscal Policy: Expansion, Contraction,
Automatic, & Discretionary
CHAPTER ELEVEN
Aggregate Demand
And
Aggregate Supply
Key concepts chapters 9 – 12!
Aggregate Demand:
...the various amounts of goods and
services - the amounts of real output that domestic consumers, businesses
and foreign buyers collectively desire
to purchase at each possible price level
Key concepts chapters 9 – 12!
Aggregate Demand:
...is downsloping because of:
Key concepts chapters 9 – 12!
Aggregate Demand:
...is downsloping because of:
1 - Wealth Effect (Real Balances)
A higher price level reduces the purchasing power of the
general public’s financial assets.
Remember the arbitrary and capricious nature of inflation???
That one was for you Sean!
Key concepts chapters 9 – 12!
Aggregate Demand:
...is downsloping because of:
1 - Wealth Effect (Real Balances)
2 - Interest-Rate Effect
When the supply of money is fixed, as price levels rise interest
rates increase because as the demand for $ increases the price
paid for its use also increases.
Key concepts chapters 9 – 12!
Aggregate Demand:
...is downsloping because of:
1 - Wealth Effect (Real Balances)
2 - Interest-Rate Effect
3 - Foreign Purchases Effect
As prices go up in the U.S, our goods become more expensive,
Thus reducing the amount of exports and increasing imports.
Key concepts chapters 9 – 12!
Aggregate expenditures
(billions of dollars)
Deriving the Aggregate Demand Curve
(C a + I g + X n + G) 1 at P 1
1
Real GDP at
price level 1
0
Price level
GDP1
P1
0
1’
GDP1
Aggregate expenditures
(billions of dollars)
Deriving the Aggregate Demand Curve
(C a + I g + X n + G) 1 at P 1
1
Real GDP at
price level 1
0
Price level
GDP1
P1
0
1’
GDP1
What if
prices go
up?
Aggregate expenditures
(billions of dollars)
Deriving the Aggregate Demand Curve
(C a + I g + X n + G) 1 at P 1
(C a + I g + X n + G) 2 at P 2
1
2
0
Price level
GDP2 GDP1
P2
P1
0
2’
1’
GDP2 GDP1
A Lower Real
GDP Exists
at price level 2
Aggregate expenditures
(billions of dollars)
Deriving the Aggregate Demand Curve
(C a + I g + X n + G) 1 at P 1
(C a + I g + X n + G) 2 at P 2
1
2
0
Price level
GDP2 GDP1
P2
P1
0
2’
1’
GDP2 GDP1
A Lower Real
GDP Exists
at price level 2
What if
prices go
up again?
Aggregate expenditures
(billions of dollars)
Deriving the Aggregate Demand Curve
(C a + I g + X n + G) 1 at P 1
(C a + I g + X n + G) 2 at P 2
(C a + I g + X n + G) 3 at P 3
1
2
3
0
Price level
GDP2 GDP1
P3
P2
P1
0
3’
2’
1’
GDP2 GDP1
A Still Lower
Real GDP Level
Exists at price
level 3
Aggregate expenditures
(billions of dollars)
Deriving the Aggregate Demand Curve
(C a + I g + X n + G) 1 at P 1
(C a + I g + X n + G) 2 at P 2
(C a + I g + X n + G) 3 at P 3
1
2
3
0
Price level
GDP2 GDP1
P3
P2
P1
0
3’
The Aggregate Demand
Can Be Constructed
2’
1’
GDP2 GDP1
Aggregate expenditures
(billions of dollars)
Deriving the Aggregate Demand Curve
(C a + I g + X n + G) 1 at P 1
(C a + I g + X n + G) 2 at P 2
(C a + I g + X n + G) 3 at P 3
1
2
3
0
Price level
GDP2 GDP1
P3
P2
P1
0
3’
The Aggregate Demand
Can Be Constructed
2’
1’
GDP2 GDP1
CHANGES IN AGGREGATE DEMAND
Price level
AD Can increase...
AD1
0
Real domestic output, GDP
Price level
CHANGES IN AGGREGATE DEMAND
AD2
AD1
0
Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND
Price level
AD Can decrease...
AD2
AD1
0
Real domestic output, GDP
Price level
CHANGES IN AGGREGATE DEMAND
AD2
AD3
0
Real domestic output, GDP
AD1
DETERMINANTS OF AGGREGATE DEMAND
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
• Consumer expectations
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
• Consumer expectations
• Consumer indebtedness
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
• Consumer expectations
• Consumer indebtedness
• Taxes
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
• Consumer expectations
• Consumer indebtedness
• Taxes
Change in Investment Spending
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
• Consumer expectations
• Consumer indebtedness
• Taxes
Change in Investment Spending
• Interest rates
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
• Consumer expectations
• Consumer indebtedness
• Taxes
Change in Investment Spending
• Interest rates
• Profit expectations on investment projects
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
• Consumer expectations
• Consumer indebtedness
• Taxes
Change in Investment Spending
• Interest rates
• Profit expectations on investment projects
• Technology
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
• Consumer wealth
• Consumer expectations
• Consumer indebtedness
• Taxes
Change in Investment Spending
• Interest rates
• Profit expectations on investment projects
• Technology
• Degree of excess capacity – Inventory!
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Government Spending
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Government Spending
Change in Net Export Spending
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Government Spending
Change in Net Export Spending
• National income abroad
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMAND
Change in Government Spending
Change in Net Export Spending
• National income abroad
• Exchange rates
illustrated...
Key concepts chapters 9 – 12!
Aggregate expenditures
(billions of dollars)
Changes in the Aggregate Demand Curve
(C a + I g + X n + G) 1 at P 1
An Increase
in Aggregate
Expenditures
Price level
0
GDP1
An Increase in
Aggregate Demand
P1
AD1
0
GDP1
Aggregate expenditures
(billions of dollars)
Changes in the Aggregate Demand Curve
(C a + I g + X n + G) 2 at P 1
(C a + I g + X n + G) 1 at P 1
An Increase
in Aggregate
Expenditures
Price level
0
GDP1GDP2
An Increase in
Aggregate Demand
AD2
AD1
P1
0
GDP1GDP2
Aggregate Supply:
...the level of real domestic output
which will be produced at each
price level
Key concepts chapters 9 – 12!
Aggregate Supply:
...has three ranges:
Key concepts chapters 9 – 12!
Aggregate Supply:
...has three ranges:
1 - Horizontal Range
Key concepts chapters 9 – 12!
Aggregate Supply:
...has three ranges:
1 - Horizontal Range
2 - Vertical Range
Key concepts chapters 9 – 12!
Aggregate Supply:
...has three ranges:
1 - Horizontal Range
2 - Vertical Range
3 - Intermediate (Upsloping) Range
Key concepts chapters 9 – 12!
As developed in chapter 8...
Price level
P
Vertical
Range
Horizontal
Range
Upsloping or
Intermediate
Range
Q
Real domestic output, GDP
An Increase in Aggregate Supply
AS1
Price level
P
Q
Real domestic output, GDP
An Increase in Aggregate Supply
AS1AS2
Price level
P
Q
Real domestic output, GDP
A Decrease in Aggregate Supply
AS1AS2
Price level
P
Q
Real domestic output, GDP
A Decrease in Aggregate Supply
AS3AS1AS2
Price level
P
Q
Real domestic output, GDP
DETERMINANTS OF AGGREGATE SUPPLY
When per unit production costs change firms will alter the
amount they produce at each level. What would cause the
per unit production costs to change?
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
• Domestic resource availability
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
• Domestic resource availability
• Land
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
• Domestic resource availability
• Land
• Labor
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
• Domestic resource availability
• Land
• Labor
• Capital – (Expectations)
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
• Domestic resource availability
• Land
• Labor
• Capital
• Entrepreneurial ability
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
• Domestic resource availability
• Land
• Labor
• Capital
• Entrepreneurial ability
Change in Productivity
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
• Domestic resource availability
• Land
• Labor
• Capital
• Entrepreneurial ability
Change in Productivity
Productivity =
Key concepts chapters 9 – 12!
real output
input
DETERMINANTS OF AGGREGATE SUPPLY
Change in legal-institutional
environment
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in legal-institutional
environment
• Business taxes and subsidies
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLY
Change in legal-institutional
environment
• Business taxes and subsidies
• Government regulation
Key concepts chapters 9 – 12!
The Equilibrium Price Level
and the Equilibrium Real GDP
P
Equilibrium in the
intermediate range
Price level
AS
AD
Q1
Qe Q2
Real domestic output, GDP
Q
The Equilibrium Price Level
and the Equilibrium Real GDP
P
Price level
AS
Equilibrium in the
horizontal range
AD
Q1 Qe Q2
Real domestic output, GDP
Q
The Equilibrium Price Level
and the Equilibrium Real GDP
Price level
P
AS
AD1
Equilibrium in the
horizontal range
Q1
Real domestic output, GDP
Q
The Equilibrium Price Level
and the Equilibrium Real GDP
Price level
P
AS
AD1
Equilibrium in the
horizontal range
AD2
Q1 Q2
Real domestic output, GDP
Q
The Equilibrium Price Level
and the Equilibrium Real GDP
P
AS
Price level
AD1
Equilibrium in the
intermediate range
P1
Q1
Real domestic output, GDP
Q
The Equilibrium Price Level
and the Equilibrium Real GDP
Price level
P
AS
AD1
Equilibrium in the
intermediate range
P3
P1
AD2
Q1 Q2
Real domestic output, GDP
Q
The Equilibrium Price Level
and the Equilibrium Real GDP
P
AS
Equilibrium in the
vertical range
Price level
AD1
P5
P1
Qc
Real domestic output, GDP
Q
The Equilibrium Price Level
and the Equilibrium Real GDP
P
AS
Equilibrium in the
vertical range
P6
Price level
AD1
P5
P1
AD2
Qc
Real domestic output, GDP
Q
The Multiplier with
Price Level Changes
P
AS
AD1
Reduced
Multiplier
P3
}
Price level
Full
Multiplier
P1
}
GDP1
AD2
GDP2 GDP3
Real domestic output, GDP
Q
AS
P
Why the ratchet?
Price level
Illustrates
the downward
inflexibility
of prices.
The Ratchet Effect
next...
P3
c
a
b
P1
AD1 / 3
Q2
Q1
AD2
Q3
Real domestic output, GDP
Q
The Ratchet Effect
C
a
u
s
e
s
Key concepts chapters 9 – 12!
The Ratchet Effect
C • Wage Contracts
a
u
s
e
s
Key concepts chapters 9 – 12!
The Ratchet Effect
C • Wage Contracts
a • Morale & Productivity
u
s
e
s
Key concepts chapters 9 – 12!
The Ratchet Effect
C • Wage Contracts
a • Morale & Productivity
u • Efficiency Wages
s
e
s
Key concepts chapters 9 – 12!
The Ratchet Effect
C • Wage Contracts
a • Morale & Productivity
u • Efficiency Wages
s • Training Investments
e
s
Key concepts chapters 9 – 12!
The Ratchet Effect
C
a
u
s
e
s
• Wage Contracts
• Morale & Productivity
• Efficiency Wages
• Training Investments
• Minimum Wage
Key concepts chapters 9 – 12!
The Ratchet Effect
C
a
u
s
e
s
• Wage Contracts
• Morale & Productivity
• Efficiency Wages
• Training Investments
• Minimum Wage
• Menu Costs
Key concepts chapters 9 – 12!
The Ratchet Effect
C
a
u
s
e
s
• Wage Contracts
• Morale & Productivity
• Efficiency Wages
• Training Investments
• Minimum Wage
• Menu Costs
• Fear of Price Wars
Key concepts chapters 9 – 12!
Shifting Aggregate Supply
Price level
P
AS2 AS1 AS3
Economic
Growth
Cost-push
inflation b
a
P2
c
P1
P3
AD1
Q2 Q1 Q3
Real domestic output, GDP
Q
Shifting Aggregate Supply
Price level
P
AS2 AS1 AS3
ANY Cost-push
inflation
QUESTIONS?
b
a
P2
c
P1
P3
AD1
Q2 Q1 Q3
Real domestic output, GDP
Q
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aggregate demand
wealth effect
interest-rate effect
foreign purchases
effect
determinants of
aggregate demand
aggregate supply
horizontal range
vertical range

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intermediate range
determinants of
aggregate supply
productivity
equilibrium price level
equilibrium real domestic
output
ratchet effect
efficiency wages
menu costs
Coming next....
FISCAL
POLICY
Chapter 12
Key concepts chapters 9 – 12!