Aggregate Supply and Demand Aggregate means n n

Aggregate Supply and Demand

Aggregate means…. . n n TOTAL What are we referring to when we use the words aggregate supply and demand? n Remember this is macroeconomics.

Aggregate Demand (AD) n n What is on the diagrams axis’? Why. The y-axis is labeled “average price level” while the x-axis is labeled “Real output” or in other words……. What is AD made up of? How would we graph AD? n You might also see it labeled as Real income which is generally labeled as “Y”

C+I+G+(X-M)= n Consumptionn n n Consumer durable goods Consumer Non-durable goods Investment n n (The U. S. Economy: You Are Here ) Replacement Investment- Keeping PPF where it is Induced Investment- pushing PPF outward. Government Spending Net Exports n (Export Revenues- Import Expenditures) What is the difference between gov. spending/ purchasing and expenditure?

What causes changes in consumption? n Changes in income levels n n Changes in wealth n n n As a consumer’s incomes or the national income (rises/ falls) the AD curve shifts to the (right/ left)- Why? If you feel wealthier you might consume ______. What would make you feel wealthier? (Excluding an increase in Income) Changes in Expectations/ Confidence - How is confidence calculated?

n What can we tell from such information about AD? n What might this lead to? Think CIGX-M

What the following video that describes consumer confidence in India: n n n Click here As a producer how do you respond to such information? Why. What kind of shift could we associate with what is being described? Explain.

Interest Rates, Interest Rates!! n Changes in interest rates n What are interest rates? n The price borrowers will pay or the price lenders will be given. n n n The Central Bank of a country sets the base interest rate. From that the prime rate is set. Prime Rate- It is usually seen as the minimum interest rate a bank will charge you plus the risk in taking you on as a customer. Name five things you will need a bank loan for.

How do interest rates affect us? n Read the Article on Interest Rates and explain the importance of interest rates. n n What role do they play in the economy? What effects does a change of rates have? Use the article to support.

Importance of Interest Rates n n n As interest rates go up who benefits/ suffers? Explain. How will it affect the AD curve? As interest rates go down who benefits/ suffers? Explain. How will it affect the AD? Discussion on mortgages. n n What they are and how interest rates apply. Varied vs. Fixed Rates

A New York State of Mind n n n It is the beginning of what analysts say is the start of a recession. You are the owner of a pizza place called Gangalino’s. Your business has done extremely well over the years as you make some of the best New York slices the city has to offer…. ”They are to die for!” You are thinking about reinvesting your profits from past years into expanding your business, but your savings will only get you so far. You will most likely need to take out a loan to expand. Interest rates have been going up. Your bank has offered you a loan at a variable (changing) rate, but it might be possible to get a fixed rate. Sit down with your family, Uncle Luigi, Mamma Leoni, and your brother Angelo (or sister Margarita depending on your group) and devise a plan of action. As a group, decide what the best decision for your business is. Explain your answer. Use proper economic terminology and make reference to induced/ replacement investment. How is this related to Macroeconomics? AD?

What causes changes in investment? n n With a partner, brainstorm on ideas that might lead to changes in amount of investment in the economy. How would these changes affect the AD curve? Explain.

Causes of Investment Changes n Due to a change in: n Interest Rates n n National income level n n n Based on the graph, what is the relationship between (I) and Interest Rates? As this rises what happens to consumption? Leading to firms wanting to do what? Improved Technology- firms want to stay competitive Expectations/ Confidence n If demand is expected to fall/ rise then……

What is going to lead to changes of exports revenue vs. import expenditure? n n n Scarcity of certain resources/ goods. Tastes and preferences for certain goods Changes in incomes of domestic/ vs. foreign consumers. Trade agreements or Trade Wars Inflation/ Deflation…. etc. Changes in the value of a countries currency

Change in Exports (X) and Imports (M) n n The following tables show US exports and imports have changed in 2006 compared to 2005. First, let's take a look at changes by trading partner: n n n Changes in X and M will affect the AD curve. How? The sum of all exports and imports in the world will equal _____. What does this chart not tell us that is important in regards to drawing the AD curve? How might this affect investment in the economy?

Read the article to get a better picture of how trade plays a role in AD n Exporters weigh up Japanese earthquake cost. n n n What will the likely effects be on New Zealand’s Aggregate Demand? Explain. Draw a diagram to represent these effects? How will Japanese AD be affected by the Earthquake? Explain. Think about C + I + G + (X-M)

How might a government stimulate a slumping economy using AD ?

What causes change in government spending (G)? n The overall economic goals of the government. n n What might these be? Watch the following video and write a statement regarding the goal of the government. What does the G plan on doing and how will it affect the AD curve? Explain.

Government policies affecting AD n Fiscal Policyn Government policies that will control spending as to affect the AD: n n Direct Taxes (Income Tax/ Corporate Tax) Indirect Taxes (Sales Tax) Government Spending Projects Expansionary Fiscal Policy (Pushing AD to the right) vs. Contractionary Fiscal Policy (Pushing AD to the left) n n What would expansionary use as tools to steer AD? Contractionary? What other effects accompanies Fiscal Policy?

Find an article on a country implementing fiscal policy: n n n Identify the form of fiscal policy discussed. Explain whether it is expansionary or contractionary fiscal policy and draw a diagram to support. Explain what components of Aggregate Demand are influenced due to this policy.

Government Budget—How much does a government have to spend? ? How will they pay off the deficit that the U. S. has now? The budget is the amount of money a government has to spend. Tax Revenue – G= n n Budget Surplus Budget Deficit Where does the government borrow money from if they run a deficit? If there is a time to run a deficit when would it be? Why. Who believes this idea?

These two cartoons characterize Expansionary Fiscal Policy---in your opinion what is the problem with this type of policies at times? Why. What problems might you see with government spending? (use the cartoons for hints) Look up the term “pork barrel spending” it might help your understanding.

Government policies affecting AD n Monetary Policy n Government Policy (Central Bank) connected to the supply of money and level of interest rates in a country’s economy. n n Base Rate/ Discount Rate/ Prime RAte Reserves Printing Money What do most governments use Monetary Policy for typically? To control what? n n An example of expansionary monetary policy is above. Tightening the money supply vs. loosening

This will all have an effect on the Business Cycle. How? n n n Recession and Trough Recovery and Boom/ Peak Output Gaps- when actual output exceeds or falls under the long term growth trend. n What problem comes with a negative output gap? n n What problem comes with a positive output gap? n n n Recession- 2 consecutive quarters of negative growth Depression- Economic downturn that lasts for several years. Unemployment Typically producing beyond capacity…inflation will most likely be a problem.

n Economic Bubble- E

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