Download PP--Intro to Aggregate Demand/Supply Model

Aggregate Supply &
Demand Model
Macroeconomic Analysis
4-Types of Unemployment
• Structural
– Skills do not match demand for labor
• Cyclical
– Companies firing workers because of low demand
for products
• Frictional
– Temporarily between Jobs
• Seasonal
– Out of work based on time of year
Old School:
The Classical Economists
Adam Smith (1776), Thomas Malthus, David Ricardo, etc.
– Markets are naturally self regulating
– No government intervention necessary
– Recessions are temporary
You Cannot Be Serious.mp3
“New” School: Keynesian Economics
• The Great Depression
challenged Classical View
• John Maynard Keynes
(1883-1946) refuted the
classical theory of Adam
Smith
• Argued investment by
Government can
moderate the “ups &
downs” of business
cycle
John Maynard Keynes
AD Curve
Aggregate-demand curve (AD)=
the demand curve for the entire
economy
– demand for ALL products and
services from ALL households,
businesses, & government at each
price (inflation) level
AS Curve
• Aggregate-supply curve (AS)= the
supply curve for the entire economy
– the supply of ALL goods and services
produced by ALL businesses at each
price level
Aggregate Demand (AD)
Inflation
AD1
Real GDP
Reminder: “Full” Employment
• Between 4 and 5% unemployment
– allows for people temporarily out of work (frictional) and people who
have skills who do not match jobs available (structural)
• Levels below 4.0% unemployment run the risk of rising
inflation
3 Phases of AS Curve
(1) Flat: occurs during recessions
Unemployment is high, GDP is low
Inflation
AS
3
1
2
(3) Vertical Section: Economy is growing
too fast. Unemployment is below
Full Employment (under 4%); inflation
becomes a problem
The economy has a
SPEED LIMIT
(2) Sloping Section: no recession,
Unemployment is at the Full Employment
level (4--5%) ; this is the “sweet spot”
Real
GDP
Current Economic Situation
AS1
Inflation
Unemployment is at 6.7%
GDP is +2.4%
In which phase is the AD
curve crossing the AS
curve?
AD1
Real
GDP
AS/AD Model review sheet
• See what you understand