Chapter 32 Aggregate Demand Aggregate Supply Copyright 2018

  • Slides: 26
Download presentation
Chapter 32 Aggregate Demand Aggregate Supply Copyright © 2018 Mc. Graw-Hill Education. All rights

Chapter 32 Aggregate Demand Aggregate Supply Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Aggregate Demand • Real GDP desired at each price level • Inverse relationship •

Aggregate Demand • Real GDP desired at each price level • Inverse relationship • Real balances effect • Interest effect • Foreign purchases effect LO 1 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -2

Price level Aggregate Demand Curve AD 0 Real domestic output, GDP LO 1 Copyright

Price level Aggregate Demand Curve AD 0 Real domestic output, GDP LO 1 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -3

Changes in Aggregate Demand • Determinants of aggregate demand • Shift factors affecting C,

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 2 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -4

Price level Changes in Aggregate Demand Continued AD 2 0 LO 2 AD 3

Price level Changes in Aggregate Demand Continued AD 2 0 LO 2 AD 3 AD 1 Real domestic output, GDP Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -5

Consumer Spending • Consumer wealth • Household borrowing • Consumer expectations • Personal taxes

Consumer Spending • Consumer wealth • Household borrowing • Consumer expectations • Personal taxes LO 2 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -6

Investment Spending • Real interest rates • Expected returns • Expectations about future business

Investment Spending • Real interest rates • Expected returns • Expectations about future business conditions • Technology • Degree of excess capacity • Business taxes LO 2 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -7

Government Spending • Government spending increases • Aggregate demand increases (as long as interest

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 LO 2 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -8

Net Export Spending • National income abroad • Exchange rates • Dollar depreciation •

Net Export Spending • National income abroad • Exchange rates • Dollar depreciation • Dollar appreciation LO 2 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -9

Aggregate Supply • Total real output produced at each price level • Relationship depends

Aggregate Supply • Total real output produced at each price level • Relationship depends on time horizon • Immediate short run • Short run • Long run LO 3 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -10

Aggregate Supply: Immediate Short Run Price level Immediate-short-run aggregate supply P 1 0 ASISR

Aggregate Supply: Immediate Short Run Price level Immediate-short-run aggregate supply P 1 0 ASISR Qf Real domestic output, GDP LO 3 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -11

Aggregate Supply: Short Run AS Price level Aggregate supply (short run) 0 Qf Real

Aggregate Supply: Short Run AS Price level Aggregate supply (short run) 0 Qf Real domestic output, GDP LO 3 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -12

Aggregate Supply: Long Run Price level ASLR Long-run aggregate supply 0 Qf Real domestic

Aggregate Supply: Long Run Price level ASLR Long-run aggregate supply 0 Qf Real domestic output, GDP LO 3 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -13

Changes in Aggregate Supply • Determinants of aggregate supply • Shift factors • Collectively

Changes in Aggregate Supply • Determinants of aggregate supply • Shift factors • Collectively position the AS curve • Changes raise or lower per-unit production costs LO 4 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -14

Changes in Aggregate Supply Continued AS 3 AS 1 Price level AS 2 0

Changes in Aggregate Supply Continued AS 3 AS 1 Price level AS 2 0 LO 4 Real domestic output, GDP Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -15

Input Prices • Domestic resource prices • Labor • Capital • Land • Prices

Input Prices • Domestic resource prices • Labor • Capital • Land • Prices of imported resources • Imported oil • Exchange rates LO 4 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -16

Productivity • Real output per unit of input • Increases in productivity reduce costs

Productivity • Real output per unit of input • Increases in productivity reduce costs • Decreases in productivity increase costs Productivity = Per-unit production cost total output total inputs = total input cost total output LO 4 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -17

Legal-Institutional Environment • Legal changes alter per-unit costs of output • Taxes and subsidies

Legal-Institutional Environment • Legal changes alter per-unit costs of output • Taxes and subsidies • Extent of government regulation LO 4 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -18

Price level (index numbers) Equilibrium AS 100 a 92 b Real Output Demanded (Billions)

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 5 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -19

Changes in Equilibrium Price level AS P 2 P 1 AD 2 AD 1

Changes in Equilibrium Price level AS P 2 P 1 AD 2 AD 1 0 Qf Q 1 Q 2 Real domestic output, GDP LO 6 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -20

Decreases in AD: Recession Price level AS P 1 P 2 b a c

Decreases in AD: Recession Price level AS P 1 P 2 b a c AD 1 AD 2 0 LO 6 Q 1 Q 2 Qf Real domestic output, GDP Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -21

Decreases in AD: Recession Continued • Prices are downwardly inflexible • Fear of price

Decreases in AD: Recession Continued • Prices are downwardly inflexible • Fear of price wars • Menu costs • Wage contracts • Efficiency wages • Minimum wage law LO 6 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -22

Decreases in AS: Cost-Push Inflation Price level AS 2 P 1 AS 1 b

Decreases in AS: Cost-Push Inflation Price level AS 2 P 1 AS 1 b a AD 0 LO 6 Q 1 Qf Real domestic output, GDP Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -23

Increases in AS: Full-Employment AS 1 Price level P 3 P 2 P 1

Increases in AS: Full-Employment AS 1 Price level 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 6 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 32 -24

Stimulus and the Great Recession • Housing collapse triggers bank failures which leads to

Stimulus and the Great Recession • Housing collapse triggers bank failures which leads to recession • Federal Reserve intervenes • Lowers short-term interest rates • Federal Government begins largest peacetime program of spending 32 -25 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Stimulus and the Great Recession Continued • GDP growth has been disappointing • High

Stimulus and the Great Recession Continued • GDP growth has been disappointing • High debt load due to low interest rates • High rate of savings • Unequal impact • Price increases rather than output gains 32 -26 Copyright © 2018 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.