Aggregate Supply / Demand

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  • 1. Aggregate Supply and Demand
  • 2.
    • Defined:
    • Amounts of Real Output
    • Buyers Collectively Desire
    • At Each Possible Price Level
    AGGREGATE DEMAND
    • Aggregate Demand Curve
    • Down Sloping Due To:
      • Real-Balances Effect
      • Interest-Rate Effect
      • Foreign Purchases Effect
    Graphically…
  • 3. Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 2 Aggregate Demand Can Increase
  • 4. Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 3 Aggregate Demand Can Increase … or Decrease
  • 5. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending
    • Consumer Wealth
    • Consumer Expectations
    • Consumer Indebtedness
    • Taxes
    Change in Investment Spending
    • Real Interest Rates
    • Expected Returns
      • Expected Future Business Conditions
      • Technology
      • Degree of Excess Capacity
      • Business Taxes
  • 6. DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending
    • National Income Abroad
    • Exchange Rates
  • 7. How to increase productivity
  • 8.
    • Higher Price Levels Provide An Incentive to Produce More
    • Aggregate Supply Has Three Segments or Ranges:
      • 1 - Horizontal Range
      • 2 - Intermediate (Upsloping) Range
      • 3 - Vertical Range
    AGGREGATE SUPPLY Defined: The amounts of real output that firms will produce at each possible price level
  • 9. 3 Reasons For Downward Sloping AD Curve Real Money-balances E ffect – economy’s monetary wealth. If we buy a fixed bundle of goods & services (food/clothing/shelter), at lower prices, it now takes less money. Our accumulated savings balances [401k, CDs, bonds] will purchase more. AD Interest Rate Effect – lower interest rates increase investment and consumption. Foreign Purchase Effect – with lower U.S. prices, both Americans and foreigners buy more American goods. Market Basket PL 1 PL 2
  • 10. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Horizontal Range Upsloping or Intermediate Range Vertical Range
  • 11. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P AS 3 AS 1 AS 2 Increase In Aggregate Supply Decrease In Aggregate Supply Changes in Aggregate Supply
  • 12. DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices
    • Domestic Resource Availability
      • Land
      • Labor
      • Capital
      • Entrepreneurial Ability
    • Prices of Imported Goods
    • Market Power
  • 13. DETERMINANTS OF AGGREGATE SUPPLY Change in Productivity Change in Legal-Institutional Environment
    • Business Taxes and Subsidies
    • Government Regulation
    Productivity = Real Output Input
  • 14. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Long Run AS LR Long-run Aggregate Supply Q f Full-Employment
  • 15. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Short Run AS Aggregate Supply Short-run Q f Full- Employment
  • 16. Price Level Real Domestic Output, GDP Q P AS AD 510 502 514 EQUILIBRIUM AND CHANGES IN EQUILIBRIUM 92 100 a b Equilibrium Real Output
  • 17. Price Level Real Domestic Output, GDP Q P AS AD 1 INCREASES IN AD: DEMAND-PULL INFLATION P 2 P 1 AD 2 Q f Q 1 Q 2
  • 18. Price Level Real Domestic Output, GDP Q P AS AD 1 DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT P 1 AD 2 Q f Q 1 a c b
  • 19.
    • Wage Contracts
    • Morale, Effort, and Productivity
      • Efficiency Wages
    • Minimum Wage
    • Menu Costs
    • Fear of Price Wars
    Why prices are downwardly inflexible
  • 20. Price Level Real Domestic Output, GDP Q P AS 1 AD 1 DECREASES IN AS: COST-PUSH INFLATION P 2 Q f Q 1 a b AS 2 P 1
  • 21. Price Level Real Domestic Output, GDP Q P AS 1 AD 1 INCREASES IN AS: FULL EMPLOYMENT P 1 Q 2 Q 1 a b AS 2 P 2 … With Price-Level Stability AD 2 P 3 Q 3 Any Questions?
  • 22. Coming soon... FISCAL POLICY Chapter 12