Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Nominal rigidity wikipedia , lookup
Monetary policy wikipedia , lookup
Exchange rate wikipedia , lookup
Fei–Ranis model of economic growth wikipedia , lookup
Full employment wikipedia , lookup
Phillips curve wikipedia , lookup
Money supply wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Aggregate Demand Quantity Demanded Demand The Model of Aggregate Demand and Aggregate Supply P The price level The model determines the eq’m price level SRAS P1 “Aggregate Demand” and eq’m output (real GDP). AGGREGATE DEMAND AND AGGREGATE SUPPLY Y1 3 “Short-Run Aggregate Supply” AD Y Real GDP, the quantity of output The Aggregate-Demand (AD) Curve The AD curve shows the quantity of all goods and services demanded in the economy at any given price level. P P2 P1 AD Y2 AGGREGATE DEMAND AND AGGREGATE SUPPLY 4 Y1 Y Why the AD Curve Slopes Downward P Y = C + I + G + NX Assume G fixed by govt policy. To understand the slope of AD, must determine how a change in P affects C, I, and NX. P2 P1 AD Y2 AGGREGATE DEMAND AND AGGREGATE SUPPLY 5 Y1 Y The Wealth Effect (P and C ) Suppose P rises. 0 The dollars people hold buy fewer g&s, so real wealth is lower. 0 People feel poorer. Result: C falls. AGGREGATE DEMAND AND AGGREGATE SUPPLY 6 The Interest-Rate Effect (P and I ) Suppose P rises. 0 Buying g&s requires more dollars. 0 To get these dollars, people sell bonds or other assets. 0 This drives up interest rates. Result: I falls. (Recall, I depends negatively on interest rates.) AGGREGATE DEMAND AND AGGREGATE SUPPLY 7 The Exchange-Rate Effect (P and NX ) Suppose P rises. 0 U.S. interest rates rise (the interest-rate effect). 0 Foreign investors desire more U.S. bonds. 0 Higher demand for $ in foreign exchange market. 0 U.S. exchange rate appreciates. 0 U.S. exports more expensive to people abroad, imports cheaper to U.S. residents. Result: NX falls. AGGREGATE DEMAND AND AGGREGATE SUPPLY 8 The Slope of the AD Curve: Summary An increase in P reduces the quantity of g&s demanded because: P P2 the wealth effect (C falls) the interest-rate P1 AD effect (I falls) the exchange-rate Y2 effect (NX falls) AGGREGATE DEMAND AND AGGREGATE SUPPLY 9 Y1 Y Why the AD Curve Might Shift Any event that changes C, I, G, or NX – except a change in P – will shift the AD curve. Example: A stock market boom makes households feel wealthier, C rises, the AD curve shifts right. P P1 AD1 Y1 AGGREGATE DEMAND AND AGGREGATE SUPPLY 10 Y2 AD2 Y Why the AD Curve Might Shift 0 Changes in C 0 Stock market boom/crash 0 Preferences: consumption/saving tradeoff 0 Tax hikes/cuts 0 Changes in I 0 Firms buy new computers, equipment, factories 0 Expectations, optimism/pessimism 0 Interest rates, monetary policy 0 Investment tax credit or other tax incentives AGGREGATE DEMAND AND AGGREGATE SUPPLY 11 Why the AD Curve Might Shift 0 Changes in G 0 Federal spending, e.g., defense 0 State & local spending, e.g., roads, schools 0 Changes in NX 0 Booms/recessions in countries that buy our exports. 0 Appreciation/depreciation resulting from international speculation in foreign exchange market AGGREGATE DEMAND AND AGGREGATE SUPPLY 12 The Aggregate-Supply (AS) Curves The AS curve shows the total quantity of g&s firms produce and sell at any given price level. P LRAS SRAS AS is: upward-sloping in short run…why? Y vertical in long run…why? AGGREGATE DEMAND AND AGGREGATE SUPPLY 14 The Long-Run Aggregate-Supply Curve (LRAS) The natural rate of output (YN) is the amount of output the economy produces when unemployment is at its natural rate. P LRAS YN is also called potential output or full-employment output. AGGREGATE DEMAND AND AGGREGATE SUPPLY YN 15 Y Why LRAS Is Vertical YN determined by the P economy’s stocks of labor, capital, and natural resources, and P2 on the level of technology. An increase in P LRAS P1 does not affect any of these, so it does not affect YN. AGGREGATE DEMAND AND AGGREGATE SUPPLY YN 16 Y Why the LRAS Curve Might Shift? 0 Labor 0 Capital 0 Resources 0 Technology AGGREGATE DEMAND AND AGGREGATE SUPPLY 17 Short Run Aggregate Supply (SRAS) The SRAS curve is upward sloping: Over the period of 1-2 years, an increase in P causes an increase in the quantity of g & s supplied. P SRAS P2 P1 Y1 AGGREGATE DEMAND AND AGGREGATE SUPPLY 18 Y2 Y Why the Slope of SRAS Matters If AS is vertical, fluctuations in AD do not cause fluctuations in output or employment. If AS slopes up, then shifts in AD do affect output and employment. AGGREGATE DEMAND AND AGGREGATE SUPPLY LRAS P Phi SRAS Phi ADhi Plo AD1 Plo ADlo Ylo 19 Y1 Yhi Y Three Theories of SRAS Sticky Wages Sticky Prices Misperceptions AGGREGATE DEMAND AND AGGREGATE SUPPLY 20 Economic Fluctuations 0 Caused by events that shift the AD and/or AS curves. 0 Four steps to analyzing economic fluctuations: 1. Determine whether the event shifts AD or AS. 2. Determine whether curve shifts left or right. 3. Use AD-AS diagram to see how the shift changes Y and P in the short run. 4. Use AD-AS diagram to see how economy moves from new SR eq’m to new LR eq’m. AGGREGATE DEMAND AND AGGREGATE SUPPLY 21 The Effects of a Shift in AD Event: Stock market crash 1. Affects C, AD curve P LRAS 2. C falls, so AD shifts left 3. SR eq’m at B. P and Y lower, unemp higher 4. Over time, PE falls, SRAS shifts right, until LR eq’m at C. Y and unemp back at initial levels. AGGREGATE DEMAND AND AGGREGATE SUPPLY SRAS1 A P1 P2 SRAS2 B P3 AD1 C AD2 Y2 22 YN Y