Download Graphing Macroeconomic Problems

Graphing Macroeconomic
Problems
Full Employment (F.E.) – There
is between 5% and 5.5%
unemployment in the economy
There is 0% cyclical
unemployment
P
AS
☺
F.E.
AD= C+I+G+NX
RGDP
There are 3 macroeconomic
Problems
I. The Recessionary Gap
- caused by a leftward shift in
the AD curve (AD is too low)
AD shifts leftward when either
C, I, G, or NX decrease
ex: Consumer confidence falls
causing C to fall
P
AS
RGDPC
Rec. GAP
AD= C+I+G+NX
AD’
F.E.
RGDP
Three things to note from the
Recessionary Gap:
1. RGDP is lower than it would
be at F.E.
2. Unemployment is higher
than it would be at F.E.
3. The average price level is
lower than normal (inflation is
not a problem)
II. The Inflationary Gap
- caused by a rightward shift
in the AD curve (AD is too
high)
AD shifts rightward when either
C, I, G, or NX increase
ex: The government increases
military expenditures causing G
to increase
P
AS
AD’
AD= C+I+G+NX
F.E. RGDPC
Infl. GAP
RGDP
Three things to note from the
Inflationary Gap:
1. RGDP is higher than it would
be at F.E.
2. Unemployment is lower than
it would be at F.E.
3. The average price level is
higher than at F.E. (Inflation is
getting out of control)
III. Stagflation
- caused by a leftward shift in
the AS curve
AS shifts leftward when the cost
of production increases
ex: the price of oil, a major input
increases
P
AS’ AS
RGDPC F.E.
AD=C+I+G+NX
RGDP
Three things to note from
Stagflation:
1. RGDP is lower than it would
be at F.E.
2. Unemployment is higher
than it would be at F.E.
3. The average price level is
higher than at F.E. (Inflation is
getting out of control)
During the Oil Crisis of the late
1970’s and early 1980’s both
the inflation rate and the
unemployment rate exceeded
10%
Misery Index: The inflation rate
+ the unemployment rate
If the AS curve shifts to the right, no
problem is created.
RGDP increases, while neither
unemployment nor inflation
increase.
F.E. increases due to economic
growth
AS AS’
P
F.E.
AD=C+I+G+NX
F.E.’ RGDP
If the government takes no
action, the economy will
naturally, over time, return to
F.E. (the long run equilibrium
point in the economy)
If the economy is experiencing
high unemployment (rec. gap or
stagflation) then there is a
surplus of workers on the
market
This surplus causes the price of
workers (real wages) to fall
That is, workers’ salaries don’t
keep up with inflation
Lower wages reduce the cost of
production which in turn shifts
the AS curve rightward bringing
the economy back to F.E.
P
AS AS’
RGDPC
Rec. GAP
AD= C+I+G+NX
AD’
F.E.
RGDP
If the economy is experiencing a
shortage of workers (Inflationary
Gap) then real wages will be bid
upwards
This causes the cost of
production to increase and the
AS curve to shift leftward
bringing the economy back to
F.E.
P
AS’ AS
AD’
AD= C+I+G+NX
F.E. RGDPC RGDP
Infl. GAP