Eco 202 ch 34 aggregate demand and aggregate supply


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Eco 202 ch 34 aggregate demand and aggregate supply

  1. 1. Chapter 34Aggregate DemandandAggregate Supply
  2. 2. Field TripSAMAPermission FormTuesday April 30
  3. 3. Key Termsrecessiondepressionnatural rate of outputstagflation
  4. 4. Economic CycleFluctuations
  5. 5. Economic Cycle
  6. 6. AD-AS ModelAggregate DemandandAggregate Supply
  7. 7. RecessionA period of declining realincomes and risingunemployment defined asnegative growth for twoquarters (six months)
  8. 8. DepressionSevere recession
  9. 9. Three Key FactsIrregular and UnpredictableVariables fluctuate togetherOutput falls - Unemploymentincreases
  10. 10. VariablesGDPFinancial SystemInterest RatesUnemploymentMonetary SystemTrade Balance
  11. 11. Real - QuantitiesNominal - Money
  12. 12. ClassicalViewReal qualities matterAmount of money doesnot matter
  13. 13. NewViewReal qualitiesinteract withnominal money
  14. 14. Long Run and Short RunGood in the short runBad in the long runBad in the short runGood in the long run
  15. 15. LagTime between causeand effect
  16. 16. PriceLevelQuantity of OutputEquilibriumpricelevelEquilibriumoutputAD- AS ModelAggregateDemandAggregateSupply
  17. 17. PriceLevelQuantity of OutputWhy does the demand curveslope downward?
  18. 18. PriceLevelQuantity of OutputY1Aggregate DemandY2P1P21. real wealth increases2. interest rates fall3. exchange rates depreciateincrease spendingincrease investmentsincrease exports
  19. 19. Price LevelConsumption - Wealth EffectInvestment - Interest-Rate EffectNet Exports - Exchange-Rate Effect
  20. 20. Wealth EffectLower pricesBuy more stuffIncrease outputHigher pricesBuy less stuffDecrease output
  21. 21. Nominal - always one riyal - fixedReal - what it will buy - varies
  22. 22. Lower pricesNeed less moneyMore money to loanLower ratesBorrow easyBuy more stuffIncrease outputInterest Rate EffectHigher pricesNeed more moneyLess money to loanHigher ratesBorrow harderBuy less stuffDecrease output
  23. 23. Exchange-Rate EffectLower pricesCause interest rates to declineCauses currency to depreciateStimulates demand for localcurrencyStimulates exportsIncreases local outputHigher pricesCause interest rates to increaseCauses currency to appreciateStimulates demand for foreigncurrencyStimulates importsDecreases local output
  24. 24. PriceLevelQuantity of OutputDemand Shiftchange in consumptionchange in investmentgovernment purchasesnet exports
  25. 25. Quiz 11. Name three reasons why the Aggregate-Demand Curve slopes downward.2. Name four reasons why the Aggregate-Demand Curve shiftsWealth, Interest Rate, Exchange RateConsumption, Investment, Government, NetExports (C + I + G + NX)
  26. 26. Aggregate Demand CurveSlopes DownwardWealthInterest RateExchange RateShiftsConsumptionInvestmentGovernmentNet Exports
  27. 27. Aggregate Supply CurveTwo CurvesShort RunLong Run
  28. 28. Two Supply CurvesShort RunLong Run
  29. 29. Short RunAdrenalineGive 110%Push to exceed normalcapacity
  30. 30. Long RunRun out of AdrenalineFall back to normalCannot do 110% foreverunless.....
  31. 31. Long Run Supply CurveNew CapitalHumanPhysicalIntellectualFinancialCultural
  32. 32. PriceLevelQuantity of OutputTwo Supply CurvesShort-RunAggregateSupplyLong-RunAggregateSupplyPrice changedoes notaffect thequantity ofgoods andservicesP
  33. 33. PriceLevelQuantity of OutputP1AD- AS ModelAggregateDemandShort RunAggregateSupplyY1 Y2P2Long RunAggregateSupplyP3
  34. 34. New CapitalHumanPhysicalIntellectualFinancialCulturalPriceLevelQuantity of OutputTwo Supply CurvesLRAS1Y1LRAS2Y3LRAS3Y3
  35. 35. New CapitalHumanPhysicalIntellectualFinancialCulturalPriceLevelQuantity of OutputTwo Supply CurvesLRAS1Y1LRAS2Y3LRAS3Y3P1P2P3
  36. 36. 1. Name three reasons why the Short-RunAggregate-Supply Curve slopes upward.2. Name four reasons why the Short-RunAggregate-Supply Curve shiftsSticky Wage, Sticky Price, MisperceptionsCapital (5 things) Expected Price LevelQuiz 2
  37. 37. 4 Step Analysis1. Decide what curve the event affects.2. Decide direction of the shift3. Diagram impact4. Analyze short-run to long-run
  38. 38. StagflationA period of falling outputand rising prices
  39. 39. Remember1.Three curves:AD, SRAS, LRAS2. Event can affect one or more of thecurves3. Determine which curve and whichdirection.4. Diagram impact
  40. 40. PriceLevelQuantity of OutputAD- AS ModelAggregateDemandShort RunAggregateSupplyLong RunAggregateSupply
  41. 41. What if?1. New technological innovation?2. Large increase in money supply?3. People become worried about thefuture?4.The supply of oil is suddenly reduced?
  42. 42. What Shifts Aggregate Demand?1. Consumption - tax cut/increase, stockmarket increase/decrease2. Investment - interest rate decrease/increase3. Government Purchases - More or Less4. Net Exports - tied to exchange rates
  43. 43. What Shifts Short RunAggregate Supply?1. Capital: Cultural, Physical, Financial,Human, Intellectual2. Expectations: decrease-right, increase-left
  44. 44. Can you have a nominal changebut not a real change?Price level changes but outputstays the same