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
Chapter 19 Delving Deeper Into Macroeconomics McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives • • • • • • Aggregate demand and supply Long-term equilibrium Shifts in aggregate supply Shifts in aggregate demand Basics of saving and investment Trade deficit 19-2 Aggregate Demand • Aggregate demand is the sum of the quantity demanded from the different sectors of the economy: personal consumption (C), nonresidential investment (NR), residential investment (R), government consumption and investment (G), inventory investment (I), and net exports (NX). • The equation for aggregate demand (AD) is: AD=C+NR+R+G+I+NX. 19-3 Aggregate Demand Curve • The aggregate demand curve links the average price level of the whole economy with aggregate quantity demanded. • The aggregate demand curve is downward-sloping. – Thus, a decline in the overall price level leads to an increase in the quantity demanded by consumers, businesses, and government. 19-4 Aggregate Demand Curve • Lower aggregate prices leads to more aggregate demand, for the following reasons: – First is the wealth effect. • Lower prices lead to an increase in the value of your assets. This higher wealth leads to more spending. – Second is the interest rate effect. • Lower prices lead to lower interest rates, which increases consumption. 19-5 Aggregate Demand Curve – Third is the exchange rate effect. • As interest rates fall, it become less appealing for foreigners to invest in the US. • The demand for dollars falls, and the dollar depreciates relative to other currencies. • This increases net exports and GDP. 19-6 Aggregate Demand Curve 19-7 Aggregate Supply • Aggregate supply is the quantity of goods and services that the economy produces. • The aggregate supply curve links the average price level of the economy with the quantity of goods and services produced. • The short-run aggregate supply curve is upwardsloping. • But, in the long term, aggregate supply is vertical, because when prices rise, so do wages and all the other costs of production. 19-8 Long-Term and Short-Term Aggregate Supply Long-term aggregate supply curve Price level Short-term aggregate supply curve P1 P Q Q1 GDP 19-9 Long-term Equilibrium • The long-term aggregate equilibrium occurs at the point where long-run aggregate supply is equal to aggregate demand and the two lines cross. • This point gives us an equilibrium aggregate price level, P, for the economy, and an equilibrium output, Q. • Long-term aggregate supply is the same as potential GDP. 19-10 Aggregate Demand and Supply 19-11 Shifts in Aggregate Supply • A reduction in aggregate supply (curve shifts to the left) causes equilibrium output to fall and the price level to rise. – Thus, inflation rises and growth slows. • An increase in aggregate supply (curve shifts to the right) causes equilibrium output to increase and the price level to fall. – Thus, inflation is reduced and growth rises. 19-12 Shift in Aggregate Supply Aggregate supply after terrorist attack Price level Original aggregate supply curve P1 P Aggregate demand curve Q1 Q GDP 19-13 Shifts in Aggregate Demand • An increase in aggregate demand (curve shifts to the right) causes both the equilibrium level of output and the price level to rise. – Thus, both inflation and growth increase. – But this is only temporary. • A decrease in aggregate demand (curve shifts down to left) causes both equilibrium output and the price level to fall. – Thus, both inflation and growth slow. 19-14 Shifts in Aggregate Demand • Shifts in demand lead to only temporary changes in quantity. • As prices and wages adjust, the economy moves along the long-term supply curve, with prices higher but output moving back to the starting point. • Attempts by policymakers to stimulate the economy and boost output above its longterm equilibrium level may succeed temporarily. 19-15 Shifts in Aggregate Demand • In the long run, however, the only outcome of government stimulation is to increase inflation. • In other words, there is no sustainable way to drive unemployment down below its natural rate. 19-16 Shift in Aggregate Demand Long-term aggregate supply curve Price level Short-term aggregate supply curve C P2 P1 B P A New aggregate demand curve Original aggregate demand curve GDP Q Q2 Q1 19-17 Saving and Investment • Saving is the portion of income that is not consumed. • It is available to invest in long-term assets. • There are three types of savings: – Personal savings are what remains from household income after taxes and consumption spending are taken out. – Government savings are the excess of tax revenue over current spending – that is, the amount of money the government accumulates. 19-18 Saving and Investment – Business savings are the part of corporate profits that are not distributed in the form of stock dividends or some other payment to owners. • National savings is the sum of personal savings, government savings, and business savings. • Another source of potential funding of investment is flows of money from outside the US. 19-19 Sources and Uses of Savings 19-20 What Determines Savings? • The personal savings rate in the United States has been falling. It was over 10% in the early 1980s, and now it is reportedly close to zero. – The personal savings rate is equal to personal savings as a percentage of disposable personal income. • The personal savings rate in the US is much lower than in many other countries. This is also true of the national saving rate. 19-21 The US Personal Savings Rate 19-22 Does Saving Matter? • In a closed economy (no global connections), savings are important, because they determine investment in the long run. • But in a global economy, investments can be funded with overseas monies. • The country is effectively borrowing the money from overseas. • The question is whether this can be sustained. 19-23 Savings versus Investment 19-24 Trade Deficit • The trade balance is the difference between exports of goods and services and imports of goods and services. • If the trade balance is negative – that is, if imports exceed exports – we say that the country is running a trade deficit. • The US trade deficit has increased significantly in recent years. 19-25 Goods and Services Trade Balance as Percent of GDP 19-26 Explanation for the Trade Deficit • There are a number of possible explanations for the trade deficit: – First, it is our fault because: • US manufacturers are unable to compete. • US consumers are overspending, causing the deficit. • Overspending by the federal government is the cause. 19-27 Explanation for the Trade Deficit – Second, it is their fault because: • Foreign countries put up barriers that keep out US exports and subsidize their own exports. – Finally, it is no one’s fault because: • The strength of the US economy allows us to import more goods. • Other countries want to lend to the US. 19-28 Paying for Trade • The US can pay for what we import in four ways: – Sell exports to foreigners. – Borrow money from foreign investors. – Sell assets such as stocks, bonds, and real estate to foreign investors. – Allow foreign companies to build factories in the US. 19-29