1
CH33 Aggregate Demand and
Aggregate Supply
2
Index	
•  Long run and short run fluctuations	
•  Demand curve in the short run	
•  Supply curve in the short run	
•  Tw...
3
Index	
•  Long run and short run fluctuations	
•  Demand curve in the short run	
•  Supply curve in the short run	
•  Tw...
4
The realty of short-run fluctuations

in USA	
In the short run,real and nominal variables are highly interwined,and
chan...
5
The realty of short-run fluctuations

in Japan	
%	
10億円
6
Three key facts about economic
fluctuations	
•  Fact1:Economic fluctuations are irregular and
unpredictable	
•  Fact2:Mo...
7
The most important macro economic 

variables in the long run	
Chap 25	
Chap 26	
Chap 27	
Chap 28	
Chap 29	
Chap 30	
the...
8
The classical dichotomy 

and monetary neutrality	
The Classical dichomomy	
 Monetary neutrality	
・the separation of var...
9
Index	
•  Long run and short run fluctuations	
•  Demand curve in the short run	
•  Supply curve in the short run	
•  Tw...
10
The model of aggregate demand

and aggregate supply	
quantity of output	
quantity of output	
quantity of output	
Price ...
11
Why the aggregate-demand curve 

slopes down	
quantity of output	
Price 	
level	
	
•  The price level and consumption:T...
12
Why aggregate demand curve might shift	
•  Shifts arising from changes in 	
	
demand factor	
 more	
 less	
consumption	...
13
Index	
•  Long run and short run fluctuations	
•  Demand curve in the short run	
•  Supply curve in the short run	
•  T...
14
Why the aggregate-supply curve 

is verticalin the long run	
quantity of output	
Price 	
level	
 P1	
P2	
1. A change in...
15
Why the long run 

aggregate supply curve might shift	
•  Shifts arising from changes in 	
	
Supply factor	
 more	
 les...
16
Using aggregate demand and aggregate supply
to depict long run growth and inflation	
Price level	
Quantity of output	
Y...
17
Why does the short run aggregate supply curve
slopes upward?	
quantity of output	
Price 	
level	
The sticky wage	
theor...
18
Mathematical expression of Supply	
Quantity 	
of output	
supplied	
Natural 	
rate of	
output	
Actual	
price	
level	
Exp...
19
Why the short run 

aggregate supply curve might shift	
•  Shifts arising from changes in 	
	
Supply factor	
 more	
 le...
20
Index	
•  Long run and short run fluctuations	
•  Demand curve in the short run	
•  Supply curve in the short run	
•  T...
21
Four steps for analyzing 

macroeconomic flucuations	
Step1	
Step2	
Step3	
Step4	
Decide whether the event shifts the a...
22
A contraction in aggregate demand	
P1	
P2	
P3	
long run
aggregate
supply	
Price	
level	
Quantity of uotput	
short run
a...
23
Three important lessons

from shift in aggregate demand	
•  In the short run,shifts in aggregate demand cause
fluctuati...
24
[case study1]

The great depression and world warⅡ	
• Many economists place primary blame on the decline in the money s...
25
[case study2]

The recession of 2008-2009	
Back ground	
After bubble	
bursting	
Government 	
Policy	
・Fed's lowered int...
26
The effect of a shift in aggregate supply	
long run
aggregate
supply	
Short run
aggreagte 	
suppply,
AS1	
P1	
P2	
Price...
27
Two important lessons

from shift in aggregate demand	
•  Shifts in aggregate supply can cause stagflation- a
combinati...
28
[case study3]

Oil and Economy	
mid-1970s	
the late 1970s	
In 1986	
OPEC attempted to thwart competition and reduce
pro...
29
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20120826 mankiw economics chapter33

  1. 1. 1 CH33 Aggregate Demand and Aggregate Supply
  2. 2. 2 Index •  Long run and short run fluctuations •  Demand curve in the short run •  Supply curve in the short run •  Two causes of economis fluctuations
  3. 3. 3 Index •  Long run and short run fluctuations •  Demand curve in the short run •  Supply curve in the short run •  Two causes of economis fluctuations
  4. 4. 4 The realty of short-run fluctuations
 in USA In the short run,real and nominal variables are highly interwined,and changes in the money supply can temporarily push real GDP away from its long-run trend. (a)Real GDP (b)investment spending (c)Unemployment rate
  5. 5. 5 The realty of short-run fluctuations
 in Japan % 10億円
  6. 6. 6 Three key facts about economic fluctuations •  Fact1:Economic fluctuations are irregular and unpredictable •  Fact2:Most macroeconmic quantities fluctuate together •  Fact3:As output falls,unemployment rises
  7. 7. 7 The most important macro economic 
 variables in the long run Chap 25 Chap 26 Chap 27 Chap 28 Chap 29 Chap 30 the level and growth of productivity and real GDP How the financial system works and How the real interest rate adjusts to balance saving and investment Why there is always some unemployment in the economy the monetary system and how changes inthe money supply affect the price level,the inflation rate, and the nominal interest rate Chap 31 Chap 32 extention of this analysis to open economies to explain the trade balance and the exchange rate. GDP financial system Unemployment Monetary system Open Economy Chapter Key words Contens
  8. 8. 8 The classical dichotomy 
 and monetary neutrality The Classical dichomomy Monetary neutrality ・the separation of variables into real variables and nominal variables ・Changes in the money supply affect nominal variables but not real variables. MacroEconomic Theory in the long-run (Chap25-32)
  9. 9. 9 Index •  Long run and short run fluctuations •  Demand curve in the short run •  Supply curve in the short run •  Two causes of economis fluctuations
  10. 10. 10 The model of aggregate demand
 and aggregate supply quantity of output quantity of output quantity of output Price level Price level Price level model of market demand and supply in microeconomics model of aggregate demand and suppy in the long-run model of aggregate demand and suppy in the short-run
  11. 11. 11 Why the aggregate-demand curve 
 slopes down quantity of output Price level •  The price level and consumption:The wealth effect –  Consumers are wealthier,which stimulates the demand for consumption goods. •  The price level and investment:The interest rate effect –  Interest rates fall,the demand for investment goods. •  The price level and net exports:The exchange rate effect –  The currency depreciates,which stimulates the demand for net exports. Y=C+I+G+NX
  12. 12. 12 Why aggregate demand curve might shift •  Shifts arising from changes in demand factor more less consumption a cut tax a stock market booom a tax hike a stock market decline investment optimism about future a fall in interest rate pessimism about future a rise in interest rate government purchases greater spending on defense or highway construction a cutback in defense or high way spending net exports a boom overseas speculation that causes an exchange- rate depriciation a recession overseas speculation that causes an exchange-rate appreciation quantity of output Price level Y=C+I+G+NX
  13. 13. 13 Index •  Long run and short run fluctuations •  Demand curve in the short run •  Supply curve in the short run •  Two causes of economis fluctuations
  14. 14. 14 Why the aggregate-supply curve 
 is verticalin the long run quantity of output Price level P1 P2 1. A change in the price level... 2 does not affect the quantitiy of goods and services supplied in the long run. Natural rate of output In the long run, an economy's production of goods and services(its real GDP) 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.
  15. 15. 15 Why the long run 
 aggregate supply curve might shift •  Shifts arising from changes in Supply factor more less Labor increasing workers decreasing workes Capital increse in the economy's capital stock decrese in the economy's capital stock Natural resources The discovery of new mineral A change in the availability of resources Technological knowledge The invention of computers opening up international trade new regulations preventing firms from using some production methods quantity of output Price level Natural rate of output
  16. 16. 16 Using aggregate demand and aggregate supply to depict long run growth and inflation Price level Quantity of output Y2000 Y2010 Y1990 P1990 P2000 P2010 1. In the long run,technological progress shifts long-run aggregate supply 2. and growth in the money supply shifts aggregate demand. 2. and growth in the money supply shifts aggregate demand. 4. and ongoing inflation
  17. 17. 17 Why does the short run aggregate supply curve slopes upward? quantity of output Price level The sticky wage theory The sticky price theory The misperception theory An unexpectedly low price raises the real wage,which causes firms to hire fewer workers and produce a smaller quantity of goods ans services. An unexpectedly low price level leaves some firms with higher than desired prices,which depress their sales and leads them to cut back production. An unexpectedly low price level leads some suppliers to think their relative prices have fallen,which induces a fall in production.
  18. 18. 18 Mathematical expression of Supply Quantity of output supplied Natural rate of output Actual price level Expected price level = + a - a number that determines how much output responds to unexpected changes in the price level. Output deviates in the short run from its long run level(the natural rate) when the actual price level that people had expected to prevail.
  19. 19. 19 Why the short run 
 aggregate supply curve might shift •  Shifts arising from changes in Supply factor more less Labor increasing workers decreasing workes Capital increse in the economy's capital stock decrese in the economy's capital stock Natural resources The discovery of new mineral A change in the availability of resources Technological knowledge The invention of computers opening up international trade new regulations preventing firms from using some production methods quantity of output Price level Natural rate of output Wages,prices,and perceptions are based on the expected price level. So when people change their expectations of the price level,the short run aggregate supply curve shift.
  20. 20. 20 Index •  Long run and short run fluctuations •  Demand curve in the short run •  Supply curve in the short run •  Two causes of economis fluctuations
  21. 21. 21 Four steps for analyzing 
 macroeconomic flucuations Step1 Step2 Step3 Step4 Decide whether the event shifts the aggregate demand curve or the aggregate supply curve(or perhaps both) Use the diagram of aggregate demand and aggregate supply to determine the impact on output and the price level in the short run. Decide in which direction the curve shifts Use the diagram of aggregate demand and aggregate supply to analyze how the economy moves from its new short run equilibrium to its long run equilibriu.
  22. 22. 22 A contraction in aggregate demand P1 P2 P3 long run aggregate supply Price level Quantity of uotput short run aggregate supply,AS1 AS2 Aggregate demand,AD1 AD2 A B C 3 4 2 1 1. A decrease in aggregate demand 2. …cause output to fall in the short run 3. ...but over time,the short run aggregate supply curve shirt 4. ...and outputs returns to its natural rate
  23. 23. 23 Three important lessons
 from shift 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 overrall price level but do not affect output. •  Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.
  24. 24. 24 [case study1]
 The great depression and world warⅡ • Many economists place primary blame on the decline in the money supply. ü Fed's failure,banking system. • Other economists fave suggested alternative reasons for the collapse in aggregate demand. ü stock prices fell, financing distress • Government purchases of goods and services increased almost fivefold from 1939 to 1944. ü devoting more resource to the military
  25. 25. 25 [case study2]
 The recession of 2008-2009 Back ground After bubble bursting Government Policy ・Fed's lowered interest rates to historically low levels. ・Substantial boom in the housing market. ・Development of securitization. ・Home owners were underwater. ・Various financial institutionsuffered from huge loss. ・The economy experienced a large contractionary shift inaggregate demand. ・Fed cut its target for the federal funds rate from. ・Congress appropriateed $700 billion for the Treasury to use to rescue the financial system. ・Large increase in government spending.
  26. 26. 26 The effect of a shift in aggregate supply long run aggregate supply Short run aggreagte suppply, AS1 P1 P2 Price level A B AS2 Y1 Y2 long run aggregate supply Short run aggreagte suppply, AS1 P1 P2 Price level A B AS2 Y1 aggreagte demand aggreagte demand、AD1 AD2 1.An adverse shift in the short run aggregate supply curve 3...which causes the price level to rise further 2....policy maker can accomodate the shift by expanding aggregate demad 4...but keep output at its natural rate. P3
  27. 27. 27 Two important lessons
 from shift in aggregate demand •  Shifts in aggregate supply can cause stagflation- a combination of recession(falling output) and inflation(rising prices.) •  Policy makers who can influence aggregate demand can potentially mitigate the adverse impact on output but only at the cost of exacerbating the problem of inflation.
  28. 28. 28 [case study3]
 Oil and Economy mid-1970s the late 1970s In 1986 OPEC attempted to thwart competition and reduce production to raise prices. ・The OPEC countries again restricted the supply of oil to raise the price. ・Squabbling broke out among members of OPEC. ・Member countries reneged on their agreements to restrict oil production. Recently Conservation efforts and changes in technology have reduced the economy's dependence on oil.
  29. 29. 29 EOF

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