Macro 12

2. Lecture 12
Macroeconomics

4. AD
Real GDP Growth Rate
Price
Level
AS
Adam Smith
Classical Model

5. AD
100
Price
Level
AS
Adam Smith
Classical Model
Recession
Unemployment
Real GDP
$6.50
$4.00
50

6. Father of
Macroeconomics
John Maynard Keynes
(1883 - 1946)
The GeneralTheory of
Employment,
Interest and Money
The ideas of economists and
political philosophers are more
powerful than commonly
understood; indeed the world is
ruled by little else.

7. AD
Price
Level
LRAS
Adam Smith
Neo-Classical Model
Real GDP
SRAS
John Keynes

8. AD
Real GDP Growth Rate
Inflation
Rate
π
LRAS
SRAS
Recession
Inflation

9. Negative Positive
Shift Left Shift Right
Aggregate
Supply
Curve
Bad weather Good weather
Higher oil price Lower Oil Price
Tech slump Tech boom
Higher business taxes or
regulations
Lower business taxes or regulation
War, Earthquake, Pandemic Smooth production
Aggregate
Demand
Curve
Slower Money Supply Growth Faster money Supply Growth
Fear Confidence
Reduced Wealth Increased Wealth
Higher Personal Taxes Lower Personal Taxes
Lower Government Spending Higher Government Spending
Decreased Export Growth Increased Export Growth
Increased Import Growth Decreased Import Growth

10. AD
Price
Level
LRAS
Real GDP
SRAS

11. Graphing Quiz
Total Spending Growth Rate is 12%
Inflation Rate is 8%
Growth Rate?
Reduce Money Growth Rate to 4%
Graph the Process
Explain

12. 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Real GDP Growth Rate
Inflation
Rate
Total Spending Rate = Inflation Rate + Real GDP Growth Rate

13. 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Real GDP Growth Rate %
Inflation
Rate
%
AD1
LRAS SRAS
AD2
8% Inflation
4% Growth
12% Total Spending
7% Inflation
1% Growth
8% Total Spending
4% Inflation
4% Growth
8% Total Spending
Short
Run
Long
Run

14. Great Depression 1929-1940
MV = PY
M = Reduced
V = Reduced
P = Stuck
Y = Reduced

16. Aggregate Supply Curve

17. Aggregate Demand Curve

18. π Y
Quiz ADAS Modeling Inflation Output
Curve Direction Level Level
1. Good Weather
2. Slower Money Growth Rate
3. Lower Business Taxes
4. Decrease in Exports
5. New innovation
6. Lower electricity prices
7. Higher Personal Taxes
8. Earthquake

19. AD
Real GDP Growth Rate
Inflation
Rate
π
LRAS
SRAS

20. Mv = PYR
Rates
M + v = P +YR

21. 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
-2% 0% 2% 4% 6%
Aggregate Demand
AD = M +V = 5%P
Inflation
Rate
Y - Real GDP Growth Rate
5% = P +Y
AD = 7%

22. 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
-2% 0% 2% 4% 6%
Aggregate Demand
P
Inflation
Rate
Y - Real GDP Growth Rate

23. Quiz
If %∆M (Money)is growing at 4% and %∆V
(Velocity) is growing at 2%, create a graph
to show the aggregate demand curve for
the growth rate for %∆P (inflation) and
%∆Y (GDP).

24. %∆M + %∆V = 6% = %∆P + %∆Y
6%
6%0%
0%
%∆P Inflation π
%∆Y GDP
Aggregate Demand

25. Two Supply Curves
Long-Run
Short-Run

26. LRAS
AD (M + v = 10%)
P
Inflation
Rate
π
Y
Real GDP
growth rate
M + v = P + Y
M + v = 10% = 7% + 3%
If Real growth is 3%, and M
is 10%, what is inflation?
3%
7%
11%
3%
7%-1%

27. LRAS1
AD (M + v = 10%)
P
Inflation
Rate
π
Y
Real GDP
growth rate
M + v = P + Y
3%
7%
11%
3%
7%-1%
LRAS2LRAS3
New Capital
Human Beings
Ideas
Human
Physical
Intellectual
Financial
Cultural
Markets
Entrepreneurs
Innovations

28. LRAS1
AD (M + v = 10%)
P
Inflation
Rate
π
Y
Real GDP
growth rate
M + v = P + Y
3%
7%
11%
3%
7%-1%
New Capital
Human Beings
Ideas
Human
Physical
Intellectual
Financial
Cultural
Markets
Entrepreneurs
Innovations

29. Two Supply Curves
Long-Run
Short-Run

30. Short-Run Supply Curve
Adrenaline
Give 110%
Push to exceed normal
capacity

31. Long Run
Run out of Adrenaline
Fall back to normal
Cannot do 110% forever
unless.....