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12 SHORT-RUN ECONOMIC FLUCTUATIONS Chapter 33 Aggregate Demand and Aggregate Supply Short-Run Economic Fluctuations • Economic activity fluctuates from year to year. – In most years production of goods and services rises. – On average over the past 50 years, production in the U.S. economy has grown by about 3 percent per year. – In some years normal growth does not occur, causing a recession. Short-Run Economic Fluctuations • A recession衰退 is a period of declining real incomes, and rising unemployment. • A depression 萧条 is a severe recession. 33.1 THREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS 33.1.1. Fact 1: Economic fluctuations are irregular and unpredictable • Fluctuations in the economy are often called the business cycle. Economic fluctuations correspond to changes in business conditions. • When real GDP grow rapidly, business is good. During such periods of economic expansion, firms find that customers are plentiful and that profits are growing. • On the other hand, when real GDP falls during recessions, businesses have trouble. During such periods of economic contraction, most firms experience declining sales and dwindling profits. Figure 1 A Look At Short-Run Economic Fluctuations (a) Real GDP Billions of 1996 Dollars $10,000 9,000 Real GDP 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1965 1970 1975 1980 1985 1990 1995 2000 Figure 1a. A Look At Short-Run Economic Fluctuations of China Figure.1952-2005 real GDP in China 3E+12 3E+12 2E+12 2E+12 1E+12 5E+11 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 1961 1958 1955 1952 0 33.1.2 Fact 2: Most macroeconomic variables fluctuate together • Most macroeconomic variables that measure some type of income, spending, or production fluctuate closely together. When real GDP falls in a recession, so do personal income, corporate profits, consumer spending, investment spending, industrial production, retail sales, home sales, auto sales, and so on. Because recessions are economy-wide phenomena, they show up in many sources of macroeconomic data. • Although many macroeconomic variables fluctuate together, they fluctuate by different amounts. Figure 1 A Look At Short-Run Economic Fluctuations (b) Investment Spending Billions of 1996 Dollars $1,800 1,600 1,400 Investment spending 1,200 1,000 800 600 400 200 1965 1970 1975 1980 1985 1990 1995 2000 33.1.3 Fact 3: As output falls, unemployment rises • Change in the economy’s output of goods and services are strongly correlated with changes in the economy’s utilization of its labor force. In other words, when real GDP declines, the rate of unemployment rises. • Changes in real GDP are inversely related to changes in the unemployment rate. • During times of recession, unemployment rises substantially. Figure 1 A Look At Short-Run Economic Fluctuations (c) Unemployment Rate Percent of Labor Force 12 10 Unemployment rate 8 6 4 2 0 1965 1970 1975 1980 1985 1990 1995 2000 33.2 EXPLAINING SHORT-RUN ECONOMIC FLUCTUATIONS 33.2.1 How the Short Run Differs from the Long Run • All of this previous analysis was based on two related ideas—the classical dichotomy and monetary neutrality. • Most economists believe that classical theory describes the world in the long run but not in the short run. • According to classical macroeconomic theory, Changes in the money supply affect nominal variables but not real variables in the long run. • The assumption of monetary neutrality is not appropriate when studying year-to-year changes in the economy. 33.2.2 The Basic Model of Economic Fluctuations • Two variables are used to develop a model to analyze the short-run fluctuations. – The first variable is the economy’s output of goods and services measured by real GDP. – The second variable is the overall price level measured by the CPI or the GDP deflator. 33.2.2 The Basic Model of Economic Fluctuations • The Basic Model of Aggregate Demand and Aggregate Supply – Economist use the model of aggregate demand and aggregate supply to explain short-run fluctuations in economic activity around its long-run trend. 33.2.2 The Basic Model of Economic Fluctuations • The Basic Model of Aggregate Demand and Aggregate Supply – The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level. – The aggregate-supply curve shows the quantity of goods and services that firms choose to produce and sell at each price level. Figure 2 Aggregate Demand and Aggregate Supply... Price Level Aggregate supply Equilibrium price level Aggregate demand 0 Equilibrium output Quantity of Output 33.3 THE AGGREGATEDEMAND CURVE 33.3 THE AGGREGATE-DEMAND CURVE • The four components of GDP (Y) contribute to the aggregate demand for goods and services. Y = C + I + G + NX Figure 3 The Aggregate-Demand Curve... Price Level P P2 1. A decrease in the price level . . . 0 Aggregate demand Y Y2 2. . . . increases the quantity of goods and services demanded. Quantity of Output 33.3.1 Why the Aggregate-Demand Curve Is Downward Sloping 1. The Price Level and Consumption: The Wealth Effect 2. The Price Level and Investment: The Interest Rate Effect 3. The Price Level and Net Exports: The Exchange-Rate Effect 33.3.1 Why the Aggregate-Demand Curve Is Downward Sloping 1. The Price Level and Consumption: The Wealth Effect 财富效应 (Arthur Pigou, 1877-1959) – A decrease in the price level makes consumers feel more wealthy, which in turn encourages them to spend more. – This increase in consumer spending means larger quantities of goods and services demanded. 33.3.1 Why the Aggregate-Demand Curve Is Downward Sloping 2. The Price Level and Investment: The Interest Rate Effect (John Maynard Keynes, 1883-1946) – A lower price level reduces the interest rate, which encourages greater spending on investment goods. – This increase in investment spending means a larger quantity of goods and services demanded. 33.3.1 Why the Aggregate-Demand Curve Is Downward Sloping 3. The Price Level and Net Exports: The Exchange-Rate Effect 汇率效应 (Robert Mundell and Marcus Fleming) – When a fall in the U.S. price level causes U.S. interest rates to fall, the real exchange rate depreciates, which stimulates U.S. net exports. – The increase in net export spending means a larger quantity of goods and services demanded. 33.3.2 Why the Aggregate-Demand Curve Might Shift • The downward slope of the aggregate demand curve shows that a fall in the price level raises the overall quantity of goods and services demanded. • Many other factors, however, affect the quantity of goods and services demanded at any given price level. • When one of these other factors changes, the aggregate demand curve shifts. 33.3.2 Why the Aggregate-Demand Curve Might Shift 1) Shifts arising from Consumption: any event that changes how much people want to consume at a given price level shifts the aggregate-demand curve. (a tax cut,a stock market boom; a tax hike, a stock market decline.) 33.3.2 Why the Aggregate-Demand Curve Might Shift 2) Shifts arising from Investment: any event that changes how much firms want to invest at a given price level also shifts the aggregatedemand curve. (optimism about the future; a fall in interest rates due to an increase in the money supply; pessimism about the future, a rise in interest rates due to an decrease in the money supply.) 33.3.2 Why the Aggregate-Demand Curve Might Shift 3) Shifts arising from Government Purchases: The most direct way that policymakers shift the aggregate-demand curve is through government purchases. (greater spending on defense or highway construction; a cutback in defense or highway spending.) 33.3.2 Why the Aggregate-Demand Curve Might Shift 4) Shifts arising from Net Exports: any event that changes net exports for a given price level also shifts aggregate demand. (a boom overseas, an exchange-rate depreciation; a recession overseas, an exchange-rate appreciation) Shifts in the Aggregate Demand Curve Price Level P1 D2 Aggregate demand, D1 0 Y1 Y2 Quantity of Output 33.4 THE AGGREGATE-SUPPLY CURVE 33.4 THE AGGREGATE-SUPPLY CURVE • In the long run, the aggregate-supply curve is vertical. • In the short run, the aggregate-supply curve is upward sloping. 33.4.1 Why the Aggregate-Supply Curve is Vertical in the Long-Run • The Long-Run Aggregate-Supply Curve – In the long run, an economy’s production of goods and services depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services. – Because the price level does not affect these long-run determinants of real GDP, the long-run aggregate-supply is vertical. Figure 4 The Long-Run Aggregate-Supply Curve Price Level Long-run aggregate supply P P2 2. . . . does not affect the quantity of goods and services supplied in the long run. 1. A change in the price level . . . 0 Natural rate of output Quantity of Output 33.4.1 Why the Aggregate-Supply Curve is Vertical in the Long-Run • The Long-Run Aggregate-Supply Curve – The long-run aggregate-supply curve is vertical at the natural rate of output. – This level of production is also referred to as potential output or full-employment output. 33.4.2 Why the Long-Run AggregateSupply Curve Might Shift • Any change in the economy that alters the natural rate of output shifts the long-run aggregate-supply curve. • The shifts may be categorized according to the various factors in the classical model that affect output. 33.4.2 Why the Long-Run AggregateSupply Curve Might Shift • Shifts arising – Labor – Capital – Natural Resources – Technological Knowledge 33.4.2 Why the Long-Run AggregateSupply Curve Might Shift • Shifts arising from labor: An increase in the quantity of labor available (perhaps due to a fall in the natural rate of unemployment, an increase in immigration from abroad.) shift the aggregatesupply curve to the right. • A decrease in the quantity of labor available (perhaps due to a rise in the natural rate of unemployment, many workers left the economy to go abroad.) shift the aggregate-supply curve to the left. 33.4.2 Why the Long-Run AggregateSupply Curve Might Shift • Shifts arising from capital: An increase in the economy’s capital stock (physical or human capital) increases productivity and, thereby, the quantity of goods and services supplied. As a result, the aggregate-supply curve shifts to the right. • A decrease in the economy’s capital stock (physical or human capital) decreases productivity and the quantity of goods and services supplied. shifting the aggregate-supply curve to the left. 33.4.2 Why the Long-Run AggregateSupply Curve Might Shift • Shifts arising from Natural Resources: An increase in the availability of natural resources (land, minerals, and weather) shifts the aggregatesupply curve to the right. • A decrease in the availability of natural resources shifts the aggregate-supply curve to the left. 33.4.2 Why the Long-Run AggregateSupply Curve Might Shift • Shifts arising from Technology: An advance in technological knowledge shifts the aggregatesupply curve to the right. • A decrease in technological knowledge shifts the aggregate-supply curve to the left. Figure 5 Long-Run Growth and Inflation 2. . . . and growth in the money supply shifts aggregate demand . . . Long-run aggregate supply, LRAS1980 LRAS1990 LRAS2000 Price Level 1. In the long run, technological progress shifts long-run aggregate supply . . . P2000 4. . . . and ongoing inflation. P1990 Aggregate Demand, AD2000 P1980 AD1990 AD1980 0 Y1980 Y1990 Quantity of Output 3. . . . leading to growth in output . . . Y2000 33.4.3 A New Way to Depict Long-Run Growth and Inflation • Although there are many forces that govern the economy in the long-run and can in principle cause such shifts, the two most important in practice are technology and monetary policy. • Technological progress enhances the economy’s ability to produce goods and services, and this continually shifts the long-run aggregate-supply curve to the right. • At the same time, because the Fed increases the money supply over time, the aggregate-demand curve also shifts to the right. The result is trend growth in output and continuing inflation. 33.4.3 A New Way to Depict Long-Run Growth and Inflation • Short-run fluctuations in output and price level should be viewed as deviations from the continuing long-run trends. 33.4.4 Why the Aggregate-Supply Curve Slopes Upward in the Short Run • In the short run, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied. • A decrease in the level of prices tends to reduce the quantity of goods and services supplied. Figure 6 The Short-Run Aggregate-Supply Curve Price Level Short-run aggregate supply P P2 2. . . . reduces the quantity of goods and services supplied in the short run. 1. A decrease in the price level . . . 0 Y2 Y Quantity of Output 33.4.4 Why the Aggregate-Supply Curve Slopes Upward in the Short Run • The Sticky-Wage Theory 粘性工资理论 • The Sticky-Price Theory 粘性价格理论 • The Misperceptions Theory 错觉理论 33.4.4 Why the Aggregate-Supply Curve Slopes Upward in the Short Run • 33.4.4.1. The Sticky-Wage Theory • According to the sticky-wage theory, the short-run aggregate-supply curve slopes upward because nominal wages are slow to adjust, or are “sticky” in the short run. • Because wages do not adjust immediately to a fall in the price level. A lower price level makes employment and production less profitable. So firms reduce the quantity of goods and services they supply. 33.4.4 Why the Aggregate-Supply Curve Slopes Upward in the Short Run • 33.4.4.2. The Sticky-Price Theory • The sticky-wage theory emphasizes that nominal wages adjust slowly over time. The sticky-price theory emphasizes that the prices of some goods and services adjust sluggishly in response to changing economic conditions. • Because not all prices adjust instantly to changing conditions, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and these higher-than-desired prices depresses sales and induces firms to reduce the quantity of goods and services they produce. 33.4.4 Why the Aggregate-Supply Curve Slopes Upward in the Short Run • 33.4.4.3. The Misperceptions Theory • Changes in the overall price level temporarily mislead suppliers about what is happening in the individual markets in which they sell their output. As a result of these short-run misperceptions, suppliers respond to changes in the level of prices, and this response leads to an upward-sloping aggregate-supply curve. • A lower price level causes misperceptions about relative prices. And these misperceptions induce suppliers to decrease the quantity of goods and services supplied. 33.4.4 Why the Aggregate-Supply Curve Slopes Upward in the Short Run • All three theories suggest that output deviates from its natural rate when the price level deviates from the price level that people expected. We can express this mathematically as follows: Quantity Natural Actual Expected of output = rate of + Price - price supplied output level level Where is a number that determines how much output responds to unexpected changes in the price level. 33.4.5 Why the Short-Run AggregateSupply Curve Might Shift • Shifts arising – Labor – Capital – Natural Resources. – Technology. – Expected Price Level. 33.4.5 Why the Short-Run Aggregate-Supply Curve Might Shift • When thinking about what shifts the short-run aggregate-supply curve, we have to consider all those variables that shift the long-run aggregatesupply curve plus a new variable----the expected price level—that influences sticky wages, sticky prices, and misperceptions. 33.4.5 Why the Short-Run Aggregate-Supply Curve Might Shift • An increase in the expected price level reduces the quantity of goods and services supplied and shifts the short-run aggregate supply curve to the left. • A decrease in the expected price level raises the quantity of goods and services supplied and shifts the short-run aggregate supply curve to the right. Variable Potential output Inputs Impact on aggregate supply Supplies of capital, labor, and land are the important inputs. Potential output comes when unemployment of labor and other resources is at noninflationary levels. Growth of inputs increases potential output and aggregate supply. Technologyand Innovation, technological improvement, and increased efficiency increase efficiency the level of potential output and rise aggregate supply. Production costs Lower wages lead to lower production costs; lower costs mean that quantity Wages supplied will be higher at every price level for a given potential output. A decline in foreign prices or an appreciation in the exchange rate reduces Imports prices import prices. This lead to lower production costs and raises aggregate supply. Lower oil prices or less burdensome environmental regulation lowers Other input costs production costs and thereby raises aggregate supply. TABLE 31-1 Aggregate Supply Depends upon Potential Output and Production Costs Aggregate supply relates total outputs supplied to the price level. Behind the AS curve lie fundamental factors of productivity as represented by potential outpu Appendix 33. Potential output is not maximum output 1) We must emphasize a subtle point about potential output: Potential output is the maximum sustainable output but not the absolute maximum output that an economy can produce. The economy can operate with output levels above potential output for a short time, and indeed this was the situation during the long economic expansion of the late 1990s. 2) A useful analogy is someone running a marathon. Think of potential output as the maximum speed that a marathoner can run without becoming “overheated” and dropping out from exhaustion. Clearly, the runner can run faster than the sustainable pace for a while, just as the U.S. economy grew faster than its potential growth rate during the 1990s. But over the entire course, the economy, like the marathoner, can produce only at a maximum sustainable “speed”, and this sustainable output speed is what we call potential output. (Samuelson, Economics, 17 edition, p663.) th A.1.2. Input Costs 1) The most important cost is labor earnings, which constitute about three-quarters of the overall cost of production for a country like the United States. 2) For the small open economies like the Netherlands or Hong Kong, import costs play an even greater role than wages in determining aggregate supply. (a) Increase in Potential Output P Potential output AS' Price level AS QP QP' Q Real output Figure 31-1. How Do Growth in Potential Output and Cost Increases Affect Aggregate Supply? (b) Increase in Costs P AS" Price level Potential output AS QP Q Real output Figure 31-1. How Do Growth in Potential Output and Cost Increases Affect Aggregate Supply? 33.5 TWO CAUSES OF ECONOMIC FLUCTUATIONS Figure 7 The Long-Run Equilibrium Price Level Long-run aggregate supply Short-run aggregate supply A Equilibrium price Aggregate demand 0 Natural rate of output Quantity of Output Figure 8 A Contraction in Aggregate Demand 2. . . . causes output to fall in the short run . . . Price Level Long-run aggregate supply Short-run aggregate supply, AS AS2 3. . . . but over time, the short-run aggregate-supply curve shifts . . . A P B P2 P3 1. A decrease in aggregate demand . . . C Aggregate demand, AD AD2 0 Y2 Y 4. . . . and output returns to its natural rate. Quantity of Output 33.5 TWO CAUSES OF ECONOMIC FLUCTUATIONS • Shifts in Aggregate Demand – In the short run, shifts in aggregate demand cause fluctuations in the economy’s output of goods and services. – In the long run, shifts in aggregate demand affect the overall price level but do not affect output. 33.5 TWO CAUSES OF ECONOMIC FLUCTUATIONS • An Adverse Shift in Aggregate Supply – A decrease in one of the determinants of aggregate supply shifts the curve to the left: • Output falls below the natural rate of employment. • Unemployment rises. • The price level rises. 33.5.1 The Effects of a Shift in Aggregate Supply • Now suppose that suddenly some firms experience an increase in their costs of production. For example, bad weather in farm states might destroy some crops, driving up the cost of producing food products. Or a war in the Middle East might interrupt the shipping of crude oil, driving up the cost of producing oil products. • What is the macroeconomic impact of such an increase in production costs? For any given price level, firms now want to supply a smaller quantity of goods and services. Figure 10 An Adverse Shift in Aggregate Supply 1. An adverse shift in the shortrun aggregate-supply curve . . . Price Level Long-run aggregate supply AS2 Short-run aggregate supply, AS B P2 A P 3. . . . and the price level to rise. Aggregate demand 0 Y2 2. . . . causes output to fall . . . Y Quantity of Output 33.5.1 The Effects of a Shift in Aggregate Supply • Policy Responses to Recession – Policymakers may respond to a recession in one of the following ways: • Do nothing and wait for prices and wages to adjust. • Take action to increase aggregate demand by using monetary and fiscal policy. Figure 11 Accommodating an Adverse Shift in Aggregate Supply 1. When short-run aggregate supply falls . . . Price Level Long-run aggregate supply P3 C P2 A 3. . . . which P causes the price level to rise further . . . 0 4. . . . but keeps output at its natural rate. Natural rate of output Short-run aggregate supply, AS AS2 2. . . . policymakers can accommodate the shift by expanding aggregate demand . . . AD2 Aggregate demand, AD Quantity of Output 33.5.1 The Effects of a Shift in Aggregate Supply • Stagflation – Adverse shifts in aggregate supply cause stagflation—a period of recession and inflation. • Output falls and prices rise. • Policymakers who can influence aggregate demand cannot offset both of these adverse effects simultaneously. Summary • All societies experience short-run economic fluctuations around long-run trends. • These fluctuations are irregular and largely unpredictable. • When recessions occur, real GDP and other measures of income, spending, and production fall, and unemployment rises. Summary • Economists analyze short-run economic fluctuations using the aggregate demand and aggregate supply model. • According to the model of aggregate demand and aggregate supply, the output of goods and services and the overall level of prices adjust to balance aggregate demand and aggregate supply. Summary • The aggregate-demand curve slopes downward for three reasons: a wealth effect, an interest rate effect, and an exchange rate effect. • Any event or policy that changes consumption, investment, government purchases, or net exports at a given price level will shift the aggregate-demand curve. Summary • In the long run, the aggregate supply curve is vertical. • The short-run, the aggregate supply curve is upward sloping. • The are three theories explaining the upward slope of short-run aggregate supply: the misperceptions theory, the sticky-wage theory, and the sticky-price theory. Summary • Events that alter the economy’s ability to produce output will shift the short-run aggregate-supply curve. • Also, the position of the short-run aggregate-supply curve depends on the expected price level. • One possible cause of economic fluctuations is a shift in aggregate demand. Summary • A second possible cause of economic fluctuations is a shift in aggregate supply. • Stagflation is a period of falling output and rising prices. Mankiw33. Questions for Review 1. List and explain the three reasons why the aggregatedemand curve is downward sloping?(Mankiw,ch33-pp729-731.) 2. Explain why the long-run aggregate-supply curve is vertical? (Mankiw,ch33-p734.) 3. List and explain the three theories why the short-run aggregate-supply curve is up sloping?(Mankiw,ch33-p738-740.) 4. What might shift the aggregate-demand to the left? Use the model of aggregate demand and aggregate supply to trace through the effects of such a shift.(Mankiw,ch33,p731-733.) 5. What might shift the aggregate-supply to the left? Use the model of aggregate demand and aggregate supply to trace through the effects of such a shift. (Mankiw,ch33-pp735736. & p742-table2.) 复习题 1.写出当经济进入衰退时下降的两个宏观经济变量。写出 当经济进入衰退时上升的一个宏观经济变量。 2. 画出一个有总需求、短期总供给和长期总供给的图。 仔细地标出正确的轴。 3. 列出并解释总需求曲线向右下方倾斜的三个原因。 4. 解释为什么长期总供给曲线是垂线。 5. 列出并解释为什么短期总供给曲线向右上方倾斜的三 种理论。 6. 什么因素引起总需求曲线向左移动? 用总需求和总供 给模型来探讨这种移动的影响。 7. 什么因素引起总供给曲线向左移动? 用总需求和总供 给模型来探讨这种移动的影响。