12 Aggregate Demand Aggregate Supply Mc GrawHillIrwin Copyright
- Slides: 25
12 Aggregate Demand Aggregate Supply Mc. Graw-Hill/Irwin Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved.
Aggregate Demand • Real GDP desired at each price level • Inverse relationship • Real balances effect • Interest effect • Foreign purchases effect LO 1 12 -2
Price level Aggregate Demand AD 0 LO 1 Real domestic output, GDP 12 -3
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 LO 1 12 -4
Price level Changes in Aggregate Demand AD 2 0 AD 3 AD 1 Real domestic output, GDP LO 1 12 -5
Consumer Spending • Consumer wealth • Household borrowing • Consumer expectations • Personal taxes LO 1 12 -6
Investment Spending • Real interest rates • Expected returns • Expectations about future business conditions • Technology • Degree of excess capacity • Business taxes LO 1 12 -7
Government Spending • Government spending increases • Aggregate demand increases (as • LO 1 long as interest rates and tax rates do not change) • More transportation projects Government spending decreases • Aggregate demand decreases • Less military spending 12 -8
Net Export Spending • National income abroad • Exchange rates • Dollar depreciation • Dollar appreciation LO 1 12 -9
Aggregate Supply • Total real output produced at each • LO 2 price level Relationship depends on time horizon • Immediate short run • Short run • Long run 12 -10
AS: Immediate Short Run Price level Immediate-short-run aggregate supply P 1 0 ASISR Qf Real domestic output, GDP LO 2 12 -11
Aggregate Supply: Short Run AS Price level Aggregate supply (short run) 0 Qf Real domestic output, GDP LO 2 12 -12
Aggregate Supply: Long Run Price level ASLR Long-run aggregate supply 0 Qf Real domestic output, GDP LO 2 12 -13
Changes in Aggregate Supply • Determinants of aggregate supply • Shift factors • Collectively position the AS curve • Changes raise or lower per-unit production costs LO 2 12 -14
Changes in Aggregate Supply AS 3 AS 1 Price level AS 2 0 Real domestic output, GDP LO 2 12 -15
Input Prices • Domestic resource prices • Labor • Capital • Land • Prices of imported resources • Imported oil • Exchange rates LO 2 12 -16
Productivity • Real output per unit of input • Increases in productivity reduce costs • Decreases in productivity increase costs Productivity = Per-unit production cost LO 2 total output total inputs = total input cost total output 12 -17
Legal-Institutional Environment • Legal changes alter per-unit costs of output • Taxes and subsidies • Extent of government regulation LO 2 12 -18
Price level (index numbers) Equilibrium AS 100 a 92 b Real Output Demanded (Billions) Price Level (Index Number) Real Output Supplied (Billions) $506 108 $513 508 104 512 510 100 512 96 507 514 92 502 AD 0 502 510 514 Real domestic output, GDP (billions of dollars) LO 3 12 -19
AD Increases: Demand-Pull Inflation Price level AS P 2 P 1 AD 2 AD 1 0 Qf Q 1 Q 2 Real domestic output, GDP LO 4 12 -20
Decreases in AD: Recession Price level AS P 1 P 2 b a c AD 1 AD 2 0 Q 1 Q 2 Qf Real domestic output, GDP LO 4 12 -21
Decreases in AD: Recession • Prices are downwardly inflexible • Fear of price wars • Menu costs • Wage contracts • Efficiency wages • Minimum wage law LO 4 12 -22
Decreases in AS: Cost-Push Inflation Price level AS 2 P 1 AS 1 b a AD 0 Q 1 Qf Real domestic output, GDP LO 4 12 -23
Increases in AS: Full-Employment Price level AS 1 P 3 P 2 P 1 AS 2 b a c AD 2 AD 1 0 Q 1 Q 2 Q 3 Real domestic output, GDP LO 4 12 -24
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
- Unit 3 aggregate demand aggregate supply and fiscal policy
- How to calculate aggregate demand
- Aggregate supply shifters
- Unit 3 aggregate demand aggregate supply and fiscal policy
- Sras lras
- Disaggregating the aggregate plan
- Aggregate demand supply graph
- Supply curve shift to right
- Aggregate demand supply graph
- Module 5 supply and demand introduction and demand
- Matching supply with demand
- How to mix aggregate and non aggregate tableau
- Recessionary gap aggregate demand
- Real gdp formula
- Why is aggregate demand downward sloping
- The aggregate real money demand schedule l(r,y)
- Aggregate demand graph
- Aggregate supply equation
- The aggregate real money demand schedule l(r,y)
- Which of the following shifts aggregate demand to the left?
- Aggregate demand curve
- Dad das model
- Expansionary monetary policy
- The sticky wage model
- Aggregate supply curve
- Aggregate planning in supply chain