aggregate demand and aggregate supply january 12, 2011
TRANSCRIPT
2
Aggregate Demand
• Amount of real GDP purchased at each price level
• Why the downward slope?–Real-balances effect–Interest-rate effect–Foreign purchases effect
• Consumption, investment, and net exports
4
Aggregate Demand
• Determinants of aggregate demand–Fixed variables along the demand curve
• Change in fixed variable • Multiplier effect• Consumer spending variables:
–Consumer wealth–Consumer expectations–Household borrowing–Personal taxes
5
Aggregate Demand
• Investment spending variables –Real interest rates–Expected returns
• Future business conditions• Technology• Degree of excess capacity• Business taxes
6
Aggregate Demand
• Government spending• Net export spending variables
•National income abroad•Exchange rates
7
Changes in Aggregate Demand
Real Domestic Output, GDP
Pri
ce L
evel
AD1
Increase inAggregateDemand
AD3
AD2
Decrease in AggregateDemand
8
• Amount real GDP produced at each price level
• Three time horizons• Immediate short run
–Few days to a few months–All prices fixed–Implicit price agreements –Contractual agreements
Aggregate Supply
9
Aggregate Supply
Real Domestic Output, GDP
Pri
ce L
evel ASISR
Immediate-short-run Aggregate
Supply
Qf
10
• Short run–Input prices fixed–Output prices variable–Real profit changes
• Long run–All prices variable–Full employment GDP–All prices adjust
Aggregate Supply
11Real Domestic Output, GDP
Pri
ce L
evel
0 Qf
Aggregate Supply(Short Run)
Slope not constant: per unit production cost and firm capacity
Aggregate Supply
13
• Determinants of aggregate supply• Change in input price
–Domestic resource prices–Prices of imported resources
• Change in productivity• Change in legal-institutional
environment–Business taxes and subsidies–Government regulation
Aggregate Supply
14Real Domestic Output, GDP
Pri
ce L
evel
AS1
Increase inAggregate
Supply
AS3
AS2
Decrease inAggregate
Supply
Aggregate Supply
15
Equilibrium
Real OutputDemanded(Billions)
Price Level(Index Number)
Real OutputSupplied(Billions)
$506
508
510
512
514
108
104
100
96
92
$513
512
510
507
502Equilibrium Price Level and
Equilibrium Real GDP
16
Real Domestic Output, GDP(Billions of Dollars)
Pri
ce L
evel
100
92
502 510 514
a b
AD
AS
Equilibrium
Equilibrium
17
Changes in Equilibrium
Real Domestic Output, GDP
Pri
ce L
evel
AD
AS
P1
P2
Q2Q1Qf
AD1
Increase in Aggregate Demand
Demand-PullInflation
18
Changes in Equilibrium
Real Domestic Output, GDP
Pri
ce L
evel
AD1
AS
P1
P2
Q1Q2 Qf
AD2
Decrease in Aggregate Demand
Creates aRecession
a
c
b
19
• Decrease in aggregate demand–Recession and cyclical unemployment–Deflation?
• Downward price inflexibility:–Fear of price wars–Menu costs–Wage contracts–Morale, effort, and productivity
• Efficiency wages–Minimum Wage
Changes in Equilibrium
20
Real Domestic Output, GDP
Pri
ce L
evel
AD
AS1
P1
P2
Q1 Qf
Decrease in Aggregate Supply
Cost-PushInflation
AS2
a
b
Changes in Equilibrium