Download Aggregate Demand and Aggregate Supply

29
Aggregate Demand and Aggregate
Supply
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Aggregate Demand
• The curve shows Real GDP desired
at each price level – there’s an
inverse relationship – so….there’s a
DOWNWARD slope
• Because…….
LO1
29-2
• Real balances effect - The real value of
money is measured by how many goods
and services your money will buy
• Interest effect - With lower prices,
consumers need to borrow less, the
demand for loans diminishes, so interest
rates drop.
• Foreign purchases effect - When the
U.S. price level falls, Americans buy
fewer foreign produced goods and
foreigners buy more U.S produced
goods.
Price level
Aggregate Demand
AD
0
LO1
Real domestic output, GDP
29-4
Changes in Aggregate Demand
• Determinants of aggregate demand
• Shift factors affecting C, I, G, Xn
• 2 components involved
• Change in one of the determinants
causes a change in spending
• Multiplier effect – magnifies the
initial change in spending into larger
changes in AD
LO1
29-5
Price level
Changes in Aggregate Demand
AD2
AD3
AD1
0
Real domestic output, GDP
LO1
29-6
Consumer Spending
• Consumer wealth
• Household borrowing
• Consumer expectations
• Personal taxes
LO1
29-7
Investment Spending
• Real interest rates rise, borrowing
•
LO1
costs rise and fall in investment and
fall in AD
Expected returns (positive/negative)
• Expectations about future business
conditions
• Technology
• Degree of excess capacity
• Business taxes
29-8
Government Spending
• Government spending increases
• Aggregate demand increases (as
•
LO1
long as interest rates and tax rates
do not change)
• More transportation projects
Government spending decreases
• Aggregate demand decreases
• Less military spending
29-9
Net Export Spending
• National income abroad
• Exchange rates
• Dollar depreciation – rise in exports
and fall in imports, AD shifts right
• Dollar appreciation – fall in exports
and rise in imports, AD shifts left
LO1
29-10
Aggregate Supply
• Total real output produced at each
•
LO2
price level
Relationship depends on time horizon
• Immediate short run
• Short run –the most used in our
book!
• Long run
29-11
AS: Immediate Short Run
Price level
Immediate-short-run
aggregate supply
P1
Labor is
75% of
costs
ASISR
Input
and
output
prices
are fixed
0
Qf
Real domestic output, GDP
LO2
29-12
Aggregate Supply: Short Run
AS
Price level
Aggregate supply
(short run)
0
Output
prices
are
flexible,
input
prices
are fixed
Qf
Real domestic output, GDP
LO2
29-13
Aggregate Supply: Long Run
Price level
ASLR
All prices are
flexible and
will produce
the full
employment
level no
matter the
price
Long-run
aggregate
supply
0
Qf
Real domestic output, GDP
LO2
29-14
Changes in Aggregate Supply
AS3
AS1
Price level
AS2
0
Real domestic output, GDP
LO2
29-15
Input Prices
• Domestic resource prices
• Labor
• Capital
• Land
• Prices of imported resources
• Imported oil
• Exchange rates – rise in exchange
rates = more foreign $ for each US $ shift right
LO2
29-16
Productivity
• Real output per unit of input – usually
because of a change in technology
• 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
29-17
Legal-Institutional Environment
• Legal changes alter per-unit costs of
output
• Taxes and subsidies
• Extent of government regulation
LO2
29-18
Equilibrium
Price level (index numbers)
Figure 29.7
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
29-19
ADAS
• http://www.youtube.com/watch?v=hTWPr
WmPJS0
AD Increases: Demand-Pull Inflation
Price level
AS
The shift in AD
beyond full
employment
leads to
inflation
P2
P1
AD2
AD1
0
Qf
Q1 Q2
The rise in
the Price
Level
REDUCES
the multiplier
Real domestic output, GDP
LO4
29-21
Decreases in AD: Recession
Deflation
AS
Price level
a to b
downward
price
inflexibility
P1
P2
b
a
c
a to c price
flexible
downward
AD1
AD2
0
Q1 Q2 Qf
Real domestic output, GDP
LO4
29-22
Decreases in AD: Recession
• Prices are downwardly inflexible
• Fear of price wars - Strength
• Menu costs - Sessions
• Wage contracts - Walton
• Efficiency wages - Wilson
• Minimum wage law - Carroll
LO4
29-23
Decreases in AS: Cost-Push Inflation
AS2
AS1
Price level
Recession
occurs
b
P2
P1
a
AD
0
Q1 Qf
Real domestic output, GDP
LO4
29-24
Increases in AS: Full-Employment
Price level
AS1
P3
P2
P1
AS2
b
AD1 to AD2 =
a to b =
inflation
c
a
AD2
AS1 to AS2 =
a to c = mild
inflation
AD1
0
Q1
Q2 Q3
Real domestic output, GDP
LO4
29-25