Eco 202 ch 34 aggregate demand and aggregate supply

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Eco 202 ch 34 aggregate demand and aggregate supply

  1. 1. Quiz Insurance ! Tuesday April 29 12:00 S1-38 Men S2-33 Women
  2. 2. Exam 6 Wednesday May 14 Chapters 34, 35, and 36 ! Final Thursday May 22 9:00AM - 11:30AM Auditorium !
  3. 3. Chapter 34 ! Aggregate Demand and Aggregate Supply
  4. 4. Key Terms recession depression natural rate of output stagflation !
  5. 5. Economic Cycle Fluctuations
  6. 6. Economic Cycle
  7. 7. AD-AS Model Aggregate Demand and Aggregate Supply
  8. 8. Recession A period of declining real incomes and rising unemployment defined as negative growth for two quarters (six months)
  9. 9. Depression Severe recession
  10. 10. Three Key Facts Irregular and Unpredictable Variables fluctuate together Output falls - Unemployment increases
  11. 11. Variables GDP Financial System Interest Rates Unemployment Monetary System Trade Balance
  12. 12. Real - Quantities Nominal - Money
  13. 13. Nominal - always one riyal - fixed ! Real - what it will buy - varies
  14. 14. Can you have a nominal change but not a real change? Price level changes but output stays the same ! Real - Quantity Nominal - Price
  15. 15. ClassicalView Real qualities matter ! Amount of money does not matter
  16. 16. NewView Real qualities interact with nominal money
  17. 17. Long Run and Short Run Good in the short run Bad in the long run ! Bad in the short run Good in the long run
  18. 18. Lag Time between cause and effect
  19. 19. Price Level Quantity of Output Equilibrium price level Equilibrium output AD- AS Model Aggregate Demand Aggregate Supply
  20. 20. Price Level Quantity of Output Why does the demand curve slope downward?
  21. 21. Price Level Quantity of Output Y1 Aggregate Demand Y2 P1 P2 1. real wealth increases 2. interest rates fall 3. exchange rates depreciate increase spending increase investments increase exports
  22. 22. Price Level Consumption - Wealth Effect Investment - Interest-Rate Effect Net Exports - Exchange-Rate Effect
  23. 23. Wealth Effect Lower prices Buy more stuff Increase output Higher prices Buy less stuff Decrease output
  24. 24. Lower prices Need less money More money to loan Lower rates Borrow easy Buy more stuff Increase output Interest Rate Effect Higher prices Need more money Less money to loan Higher rates Borrow harder Buy less stuff Decrease output
  25. 25. Exchange-Rate Effect Lower prices Cause interest rates to decline Causes currency to depreciate Stimulates demand for local currency Stimulates exports Increases local output ! ! ! Higher prices Cause interest rates to increase Causes currency to appreciate Stimulates demand for foreign currency Stimulates imports Decreases local output ! ! !
  26. 26. Price Level Quantity of Output Demand Shift change in consumption change in investment government purchases net exports !
  27. 27. Price Level Quantity of Output P1 AD- AS Model Aggregate Demand Short Run Aggregate Supply Y1 Y2 P2 Long Run Aggregate Supply P3
  28. 28. Quiz 1 1. Name three reasons why the Aggregate- Demand Curve slopes downward. ! ! 2. Name four reasons why the Aggregate- Demand Curve shifts Wealth, Interest Rate, Exchange Rate ! ! ! Consumption, Investment, Government, Net Exports (C + I + G + NX)
  29. 29. Aggregate Demand Curve Slopes Downward Wealth Interest Rate Exchange Rate ! Shifts Consumption Investment Government Net Exports
  30. 30. Aggregate Supply Curve Two Curves Short Run Long Run
  31. 31. Two Supply Curves Short Run Long Run
  32. 32. Short Run Adrenaline Give 110% Push to exceed normal capacity !
  33. 33. Long Run Run out of Adrenaline Fall back to normal Cannot do 110% forever unless.....
  34. 34. Long Run Supply Curve New Capital Human Physical Intellectual Financial Cultural
  35. 35. Price Level Real GDP orY AD- AS Model Aggregate Demand Short Run Aggregate Supply Long Run Aggregate Supply LRAS Shape -Vertical Capacity fixed Shift Physical Financial Human Intellectual Cultural SRAS Shape - Slope Up Sticky Wages Sticky Prices Misperceptions Shift Physical Financial Human Intellectual Cultural Expectations AD Shape - Slope Down Wealth Effect Interest Effect Exchange Effect Shift Consumption Investment Government Net Exports
  36. 36. Price Level Quantity of Output Two Supply Curves Short-Run Aggregate Supply Long-Run Aggregate Supply Price change does not affect the quantity of goods and services P
  37. 37. New Capital Human Physical Intellectual Financial Cultural Price Level Quantity of Output Two Supply Curves LRAS1 Y1 LRAS2 Y3 LRAS3 Y3
  38. 38. New Capital Human Physical Intellectual Financial Cultural Price Level Quantity of Output Two Supply Curves LRAS1 Y1 LRAS2 Y3 LRAS3 Y3 P1 P2 P3
  39. 39. 1. Name three reasons why the Short-Run Aggregate-Supply Curve slopes upward. ! ! 2. Name six reasons why the Short-Run Aggregate-Supply Curve shifts Sticky Wage, Sticky Price, Misperceptions ! ! ! Capital (5 things) and Expected Price Level Quiz
  40. 40. 4 Step Analysis 1. Decide what curve the event affects. 2. Decide direction of the shift 3. Diagram impact 4. Analyze short-run to long-run
  41. 41. Stagflation A period of falling output and rising prices
  42. 42. Remember 1.Three curves:AD, SRAS, LRAS 2. Event can affect one or more of the curves 3. Determine which curve and which direction. 4. Diagram impact
  43. 43. What if? 1. New technological innovation? 2. Large increase in money supply? 3. People become worried about the future? 4.The supply of oil is suddenly reduced?
  44. 44. What Shifts Aggregate Demand? 1. Consumption - tax cut/increase, stock market increase/decrease 2. Investment - interest rate decrease/ increase 3. Government Purchases - More or Less 4. Net Exports - tied to exchange rates
  45. 45. What Shifts Short Run Aggregate Supply? 1. Capital: Cultural, Physical, Financial, Human, Intellectual 2. Expectations: decrease-right, increase- left

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