Download Garvin Smith`s Unit 3

Aggregate Supply & Aggregate Demand
NOT Supply & Demand
Aggregate = Total national output (GDP)
Two time frames
Aggregate Supply & Aggregate Demand
The Long-run is a time frame when all adjustments
to the economy are complete.
The Long-run is a time frame when all
expectations about economic conditions are met.
The Long-run is a time frame when input and
output prices adjust together.
The Long-run is a time frame when Actual Real
GDP equals Potential Real GDP.
The Long-run is a time frame when unemployment
is at the natural rate. (e.g. no cyclical unemployment)
Aggregate Supply & Aggregate Demand
The Short-run is a time frame when all adjustments
to the economy are NOT complete.
The Short-run is a time frame when expectations
about economic conditions are NOT met.
The Short-run is a time frame when input and
output prices DO NOT adjust together.
The Short-run is when Actual Real GDP DOES
NOT equal Potential Real GDP.
The Short-run is when unemployment differs from
the natural rate. (cyclical unemployment exists)
Aggregate Supply & Aggregate Demand
BLUE =
Long Run
(Growth
Trend)
GREEN =
Short Run
Aggregate Supply & Aggregate Demand
The Long-run
Aggregate Supply
Curve is the
relationship
between the
Aggregate Quantity
of Real GDP
Supplied in the
Long-run and the
Average Price
Level.
LRAS
100
Aggregate Supply & Aggregate Demand
The Long-run
Aggregate Supply
Curve is
synonymous with
the Production
Possibilities
Frontier
Aggregate Supply & Aggregate Demand
The Long-run
Aggregate Supply
Curve is
synonymous with
the Full
Employment level
of Real GDP
Aggregate Supply & Aggregate Demand
The Long-run
Aggregate Supply
Curve is
synonymous with
Potential Real GDP
The Long Run
growth trend is the
Long Run Aggregate
Supply Curve (LRAS)
Aggregate Supply & Aggregate Demand
So: LRAS =
PPF =
Full Employment Real GDP =
Potential Real GDP =
The Economy’s Growth Trend
Aggregate Supply & Aggregate Demand
The Short-run
Aggregate Supply
Curve is the
relationship between
the Aggregate
Quantity of Real
GDP Supplied in the
Short-run and the
Average Price Level.
Aggregate Supply & Aggregate Demand
The Short-run
Aggregate Supply
Curve synonymous
with Actual Real
GDP
Aggregate Supply & Aggregate Demand
Aggregate Supply & Aggregate Demand
D
BLUE = Long Run
(Growth Trend)
A
B
D
A
B
GREEN = Short Run
Aggregate Supply & Aggregate Demand
Aggregate Demand is generated from
Aggregate Expenditure: the total
expenditure in the economy, or the sum of all
spending:
Consumption (households)
Investment (business)
Government
eXports (spending by R.O.W)
iMports (spending on R.O.W)
AD = AE = C+I+G+(X-M)
Aggregate Supply & Aggregate Demand
The Aggregate
Demand Curve is
the relationship
between the
Aggregate Quantity
of Real GDP
Demanded and the
Average Price Level.
Aggregate Supply & Aggregate Demand
Aggregate Supply & Aggregate Demand
ANYTIME there is a change in the Average
Price Level (as determined by the CPI) there
is movement along either the LRAS, the
SRAS, or the AD curves.
ANYTHING other than a change in the
Average Price Level will SHIFT the AS or the
AD curves.
ANYTHING other than a change in the
Average Price Level will SHIFT the AS or the
AD curves.
Aggregate Supply & Aggregate Demand
Aggregate Supply & Aggregate Demand
A
A
1) Point A = Full Employment Macro Long-Run Equilibrium
A
Aggregate Supply & Aggregate Demand
A
A
B
B
1) Point A = Full Employment Macro Long-Run Equilibrium
2) Point B = Decrease in business Investment = drop in Aggregate Demand
How does the economy get back to full employment?
Laissez-faire
Aggregate Supply & Aggregate Demand
C
A
AC
B
B
1) Point A = Full Employment Macro Long-Run Equilibrium
2) Point B = Decrease in business Investment = drop in Aggregate Demand
Laissez-faire = No unemployment; no welfare; no Social Security; No FED
3) Point C = high unemployment + no income = resource owners lower input
prices
Aggregate Supply & Aggregate Demand
C
C
1) Point C = Full Employment Macro Long-Run Equilibrium
C
Aggregate Supply & Aggregate Demand
D
C
D
C
1) Point C = Full Employment Macro Long-Run Equilibrium
2) Point D = Increase in business Investment = increase in Aggregate Demand
How does the economy get back to full employment?
Laissez-faire
Aggregate Supply & Aggregate Demand
D
E
C
CE
D
C
1) Point C = Full Employment Macro Long-Run Equilibrium
2) Point D = Increase in business Investment = increase in Aggregate Demand
Laissez-faire = No unemployment; no welfare; no Social Security; No FED
3) Point E = high inflation + no income = resource owners raise input
prices
Aggregate Supply & Aggregate Demand
A
A
1) Point A = Full Employment Macro Long-Run Equilibrium
A
Aggregate Supply & Aggregate Demand
A
A
B
B
1) Point A = Full Employment Macro Long-Run Equilibrium
2) Point B = Increase in resource prices (oil, wages) = decrease in Aggregate
Supply
How does the economy get back to full employment?
Laissez-faire
Aggregate Supply & Aggregate Demand
C
A
B
AC
B
C
1) Point A = Full Employment Macro Long-Run Equilibrium
2) Point B = Increase in resource prices (oil, wages) = decrease in Aggregate
Supply
Laissez-faire = No unemployment; no welfare; no Social Security; No FED
3) Point C = high unemployment + no income = resource owners lower input
prices
Aggregate Supply & Aggregate Demand
The Great Depression
1) Everything you know about the Great Depression
is wrong.
2) You can’t see the forest for the trees.
3) The Great Depression is a failure of capitalism.
4) The Great Depression was caused by the 1929
stock market crash.
5) The government got us out of the depression.
6) WWII got us out of the Great Depression.
The Great Depression
B
B
122
B
A
A
A
AD1
$103b
1) 1913: 16th amendment to the U.S. Constitution
2) 1913: Federal Reserve Act
3) 1917 – 18: World War I (FED learns how to manipulate interest rates)
3) 1917 – 18: World War I (Congress learns power of fiscal policy)
4) 1920 – 21: Recession
5) 1921 – 29: Roaring Twenties (FED keeps interest rates low)
The Great Depression
Sept. 1929: “There is no cause to worry. The high tide of
prosperity will continue” - Andrew W. Mellon, Secretary of the
Treasury.
Oct. 13, 1929: Ohio Economist Says Stock Prices Will Stay at
High Level For Years to Come - Dr. Charles Amos
Dice, professor of business organization at Ohio State
Oct. 16,1929: “FISHER SEES STOCKS PERMANENTLY
HIGH” – Nobel laureate Irving Fisher, Yale economist
Oct. 25, 1929: “BROKERS IN MEETING PREDICT
RECOVERY; Partners in 35 Wire Houses at
Conference Agree Selling Has Been Overdone.”
Oct. 27, 1929: Brokers Believe Worst Is Over and
Recommend Buying of Real Bargains – New York
Herald Tribune
The Great Depression
Oct. 29, 1929: Stock Market Crashes!
Oct. 30, 1929: “Time to Buy Stocks” - John J. Raskob, one of the
country’s leading industrial and political leaders
Nov. 22, 1929: SEES NEW BULL MARKET.; President of
Philadelphia Stock Exchange Makes Predictions.
June 13, 1930: “The worst is over without a doubt.” - James J.
Davis, Secretary of Labor.
July 6, 1930: ‘BUSINESS CYCLE’ SEEN AT NEW PHASE;
Bankers Hold Downward Trend in Markets Indicates
Recovery Is Near. DENY ANALOGY TO 1920-21
Economists Point to Superior Credit Conditions Now,
Holding Easy Money Points to Revival.
Sept. 12, 1930: “We have hit bottom and are on the
upswing.” - James J. Davis, Secretary of Labor.
The Great Depression
B
B
122
C
A
C A
B
D
E
E
F
G
G
F
D
A
C
D
G
AD1
E
F
$103b
1) 1929: Stock Market Crash
July 1928 – July 1929:
2) 1930: Smoot- Hawley Tariff
FED raises interest rates
3) 1930 – 33: Bank Failures
from 3.5% to 6%.
4) 1932: Revenue Act
5) 1932 – 33: Roosevelt’s socialist/fascist policies
6) 1937: Revenue Act
The Great Depression
Today most economists who have studied the
period blame poor economic policymaking both
in the United States and in other major
industrialized countries.” - Ben Bernanke [current chairman of the
Federal Reserve Bank], Principles of Economics, Third Ed. P. 474.
The Great Depression
“Despite the devastating loss of wealth, chaos in
our financial markets, and a loss of confidence so
great that it nearly destroyed Americans’
fundamental faith in capitalism, the economy
came back. Indeed, the growth between 1933
and 1937 was the highest we have ever
experienced outside of wartime. Had the U.S. not
had the terrible policy-induced setback in
1937, we, like most other countries in the world,
would probably have been fully recovered before
the outbreak of World War II.” - “Lessons from the Great
Depression for Economic Recovery in 2009,” Christina D. Romer, Council of Economic
Advisers [to president Obama], Presented at the Brookings Institution, Washington, D.C.,
March 9, 2009
The Great Depression
“Let me end my talk by abusing slightly my
status as an official representative of the
Federal Reserve. I would like to say to
Milton [Freidman] and Anna [Schwartz]:
Regarding the Great Depression. You're
right, we did it. We're very sorry. But thanks
to you, we won't do it again.” - Remarks by [Fed] Governor
Ben S. Bernanke, At the Conference to Honor Milton Friedman, University of Chicago,
Chicago, Illinois November 8, 2002, on Milton Friedman's ninetieth birthday.
The Great Depression
Peak August 1929, Trough May 1933
Real GDP falls 39%
Real Consumption falls 29%
Prices (GDP deflator) falls 23%
Unemployment Jumps:
3.2% in 1929
25% in 1933 (21%Darby)
17% in 1939 (17% Darby)
Banking Collapse
July 1929, 24,504 banks, $49 billion deposits.
December 1932, 17,802 banks, with $36 billion.
After Bank Holiday March 1933, 11,878 banks with $23
billion deposits.
The Great Depression
9000 Banks suspend operations.
Depositors and stockholders lose $2.5 billion =
2.4% of GDP
Money Supply Declines and there is a massive rise
in realized real interest rates, over 10%.
Friedman and Schwartz blame inaction of the Fed
for this decline---and hence for the depression.