aggregate demand and aggregate...
TRANSCRIPT
![Page 1: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/1.jpg)
Aggregate Demand and Aggregate Supply
12
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
![Page 2: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/2.jpg)
Aggregate Demand
• Real GDP desired at each price level • Inverse relationship
• Real balances effect • Interest effect • Foreign purchases effect
LO1 12-2
![Page 3: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/3.jpg)
Aggregate Demand
Real domestic output, GDP
Pric
e le
vel
AD
LO1
0
12-3
![Page 4: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/4.jpg)
Changes in Aggregate Demand
• Determinants of aggregate demand • Shift factors affecting C, I, G, Xn
• 2 components involved • Change in one of the determinants • Multiplier effect
LO1 12-4
![Page 5: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/5.jpg)
Changes in Aggregate Demand
Real domestic output, GDP
Pric
e le
vel
AD1 AD3
AD2
LO1
0
12-5
![Page 6: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/6.jpg)
Consumer Spending
• Consumer wealth • Household borrowing • Consumer expectations • Personal taxes
LO1 12-6
![Page 7: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/7.jpg)
Investment Spending
• Real interest rates • Expected returns
• Expectations about future business conditions
• Technology • Degree of excess capacity • Business taxes
LO1 12-7
![Page 8: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/8.jpg)
Government Spending
• Government spending increases • Aggregate demand increases (as
long as interest rates and tax rates do not change)
• More transportation projects • Government spending decreases
• Aggregate demand decreases • Less military spending
LO1 12-8
![Page 9: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/9.jpg)
Net Export Spending
• National income abroad • Exchange rates
• Dollar depreciation • Dollar appreciation
LO1 12-9
![Page 10: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/10.jpg)
Aggregate Supply
• Total real output produced at each price level
• Relationship depends on time horizon • Immediate short run • Short run • Long run
LO2 12-10
![Page 11: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/11.jpg)
AS: Immediate Short Run
Real domestic output, GDP
Pric
e le
vel
ASISR
Qf
Immediate-short-run aggregate supply
P1
0
LO2 12-11
![Page 12: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/12.jpg)
Aggregate Supply: Short Run
Real domestic output, GDP
Pric
e le
vel
0 Qf
AS
Aggregate supply (short run)
LO2 12-12
![Page 13: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/13.jpg)
Aggregate Supply: Long Run
Real domestic output, GDP
Pric
e le
vel
ASLR
Qf 0
Long-run aggregate supply
LO2 12-13
![Page 14: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/14.jpg)
Changes in Aggregate Supply
• Determinants of aggregate supply • Shift factors
• Collectively position the AS curve • Changes raise or lower per-unit
production costs
LO2 12-14
![Page 15: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/15.jpg)
Changes in Aggregate Supply
Real domestic output, GDP
Pric
e le
vel
AS1 AS3
AS2
0
LO2 12-15
![Page 16: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/16.jpg)
Input Prices
• Domestic resource prices • Labor • Capital • Land
• Prices of imported resources • Imported oil • Exchange rates
LO2 12-16
![Page 17: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/17.jpg)
Productivity
• Real output per unit of input • Increases in productivity reduce
costs • Decreases in productivity increase
costs
LO2
Per-unit production cost = total input cost total output
Productivity = total output total inputs
12-17
![Page 18: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/18.jpg)
Legal-Institutional Environment
• Legal changes alter per-unit costs of output • Taxes and subsidies • Extent of government regulation
LO2 12-18
![Page 19: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/19.jpg)
Equilibrium
Real domestic output, GDP (billions of dollars)
Pric
e le
vel (
inde
x nu
mbe
rs)
100
92
502 510 514
a b
AD
AS Real Output Demanded (Billions)
Price Level (Index Number)
Real Output Supplied (Billions)
$506 108 $513 508 104 512 510 100 510 512 96 507 514 92 502
0
LO3 12-19
![Page 20: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/20.jpg)
AD Increases: Demand-Pull Inflation
Real domestic output, GDP
Pric
e le
vel
AD1
AS
P1
P2
Q2 Q1 Qf
AD2
0
LO4 12-20
![Page 21: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/21.jpg)
Decreases in AD: Recession
Real domestic output, GDP
Pric
e le
vel
AD1
AS
P1
P2
Q1 Q2 Qf
AD2
c a
b
0
LO4 12-21
![Page 22: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/22.jpg)
Decreases in AD: Recession
• Prices are downwardly inflexible • Fear of price wars • Menu costs • Wage contracts • Efficiency wages • Minimum wage law
LO4 12-22
![Page 23: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/23.jpg)
Decreases in AS: Cost-Push Inflation
Real domestic output, GDP
Pric
e le
vel
AD
AS1
P1
P2
Q1 Qf
AS2
a
b
0
LO4 12-23
![Page 24: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/24.jpg)
Increases in AS: Full-Employment
Real domestic output, GDP
Pric
e le
vel
AD1
AS2
P1
P2
Q2 Q1
AS1
b
AD2
c P3
Q3
a
0
LO4 12-24
![Page 25: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/25.jpg)
Impact of Oil Prices Diminished?
• 1970’s • Reduced AS and negative GDP gap • Cost-push inflation • Rising unemployment
• 2000’s • Core inflation steady • Use 50% less oil and gas today • Federal Reserve more vigilant
12-25
![Page 26: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/26.jpg)
Stagflation is a combination of
recession (falling real GDP) and inflation. Now
we will show how stagflation could be
produced by a supply shock
![Page 27: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/27.jpg)
Inflation-Unemployment pairs for the U.S., 1960-89
Unemployment Rate
109876543
Infla
tion
Rat
e
16
14
12
10
8
6
4
2
0
8988
87
86
8584
83
82
81
80
79
78
7776
75
74
73
72
71
7069
68
6766
6564
636261
60
www.bls.gov
![Page 28: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/28.jpg)
Price per barrel of 320 crude oil Date Price ($)
Jan. 1972 1.79Dec. 1973 4.68Jan. 1974 10.84
April 1979 14.55June 1979 18.00Nov 1979 24.00Aug. 1980 30.00Oct. 1981 34.00
Source: Petroleum Economist
• Anchovies • Grain failures
![Page 29: Aggregate Demand and Aggregate Supplyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/ad_and_as… · • Changes raise or lower per-unit production costs LO2 12-14 . Changes](https://reader035.vdocuments.mx/reader035/viewer/2022063012/5fc9cf8b91d6d5626a173280/html5/thumbnails/29.jpg)
Stagflation due to oil price shock
10.0 9.75
AS0
AD
AS1
110
115
Real GDP 0
Price Level Story of Joseph Buffer Stock
program