aggregate deamnd and supply

8/21/2019 aggregate deamnd and supply

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Chapter 34

Aggregate Demand

andAggregate Supply


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Field Trip

SAMA

Permission FormTuesday April 30


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Key Terms

recessiondepression

natural rate of output

stagflation


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Economic Cycle

Fluctuations


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Economic Cycle


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AD-AS Model

Aggregate Demand

andAggregate Supply


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Recession

A period of declining real

incomes and risingunemployment defined as

negative growth for twoquarters (six months)


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Depression

Severe recession


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Three Key Facts

Irregular and Unpredictable

Variables fluctuate together

Output falls - Unemploymentincreases


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Variables

GDPFinancial System

Interest Rates

Unemployment

Monetary System

Trade Balance


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Real - QuantitiesNominal - Money


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Classical View

Real qualities matter

Amount of money does

not matter


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New View

Real qualities

interact withnominal money


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Long Run and Short Run

Good in the short run

Bad in the long run

Bad in the short runGood in the long run


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Lag

Time between cause

and effect


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Price

Level

Quantity of Output

Equilibriumprice

level

Equilibrium

output

AD- AS Model

Aggregate

Demand

Aggregate

Supply


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Price

Level

Quantity of Output

Why does the demand curve

slope downward?


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Price

Level

Quantity of Output

Y1

Aggregate Demand

Y2

P1

P2

1. real wealth increases

2. interest rates fall

3. exchange rates depreciate

increase spending

increase investments

increase exports


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Price Level

Consumption - Wealth Effect

Investment - Interest-Rate Effect

Net Exports - Exchange-Rate Effect


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Wealth Effect

Lower prices

Buy more stuff

Increase output

Higher prices

Buy less stuff

Decrease output


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Nominal - always one riyal - fixed

Real - what it will buy - varies


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Lower prices

Need less money

More money to loan

Lower rates

Borrow easy

Buy more stuff

Increase output

Interest Rate EffectHigher prices

Need more money

Less money to loan

Higher rates

Borrow harder

Buy less stuff

Decrease output


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Exchange-Rate EffectLower prices

Cause interest rates to decline

Causes currency to depreciate

Stimulates demand for localcurrency

Stimulates exports

Increases local output

Higher prices

Cause interest rates to increase

Causes currency to appreciate

Stimulates demand for foreigncurrency

Stimulates imports

Decreases local output


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Price

Level

Quantity of Output

Demand Shift

change in consumptionchange in investmentgovernment purchasesnet exports


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Quiz 1

1. Name three reasons why the Aggregate-Demand Curve slopes downward.

2. Name four reasons why the Aggregate-Demand Curve shifts

Wealth, Interest Rate, Exchange Rate

Consumption, Investment, Government, NetExports (C + I + G + NX)


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Aggregate Demand Curve

Slopes DownwardWealth

Interest Rate

Exchange Rate

ShiftsConsumption

InvestmentGovernmentNet Exports


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Aggregate Supply Curve

Two Curves

Short RunLong Run


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Two Supply Curves

Short Run

Long Run


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Short Run

Adrenaline

Give 110%Push to exceed normal

capacity


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Long Run

Run out of Adrenaline

Fall back to normalCannot do 110% forever

unless.....


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Long Run Supply Curve

New Capital

Human

Physical

IntellectualFinancial

Cultural

T S l C


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PriceLevel

Quantity of Output

Two Supply Curves

Short-Run

AggregateSupply

Long-Run

AggregateSupply

Price change

does notaffect thequantity ofgoods andservices

P

AD AS M d l


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Price

Level

Quantity of Output

P1

AD- AS Model

Aggregate

Demand

Short Run

Aggregate

Supply

Y1 Y2

P2

Long RunAggregate

Supply

P3

T S l C


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New CapitalHuman

PhysicalIntellectualFinancialCultural

Price

Level

Quantity of Output

Two Supply Curves

LRAS1

Y1

LRAS2

Y3

LRAS3

Y3

T S l C


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New CapitalHuman

PhysicalIntellectualFinancialCultural

PriceLevel

Quantity of Output

Two Supply Curves

LRAS1

Y1

LRAS2

Y3

LRAS3

Y3

P1

P2

P3


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1. Name three reasons why the Short-RunAggregate-Supply Curve slopes upward.

2. Name four reasons why the Short-RunAggregate-Supply Curve shifts

Sticky Wage, Sticky Price, Misperceptions

Capital (5 things) Expected Price Level

Quiz 2


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4 Step Analysis

1. Decide what curve the event affects.

2. Decide direction of the shift

3. Diagram impact

4. Analyze short-run to long-run


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Stagflation

A period of falling outputand rising prices


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Remember

1. Three curves: AD, SRAS, LRAS

2. Event can affect one or more of the

curves

3. Determine which curve and which

direction.4. Diagram impact

AD AS M d l


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Price

Level

Quantity of Output

AD- AS Model

Aggregate

Demand

Short Run

Aggregate

Supply

Long RunAggregate

Supply


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What if?

1. New technological innovation?

2. Large increase in money supply?

3. People become worried about thefuture?

4. The supply of oil is suddenly reduced?


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What Shifts Aggregate Demand?

1. Consumption - tax cut/increase, stockmarket increase/decrease

2. Investment - interest rate decrease/increase

3. Government Purchases - More or Less4. Net Exports - tied to exchange rates


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What Shifts Short Run

Aggregate Supply?1. Capital: Cultural, Physical, Financial,Human, Intellectual

2. Expectations: decrease-right, increase-left


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Can you have a nominal change

but not a real change?Price level changes but output

stays the same

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aggregate deamnd and supply