Chap029.ppt

Report
29
Aggregate Demand and Aggregate
Supply
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-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
LO1
29-2
Price level
Aggregate Demand
AD
0
LO1
Real domestic output, GDP
29-3
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
LO1
29-4
Price level
Changes in Aggregate Demand
AD2
AD3
AD1
0
Real domestic output, GDP
LO1
29-5
Consumer Spending
• Consumer wealth
• Household borrowing
• Consumer expectations
• Personal taxes
LO1
29-6
Investment Spending
• Real interest rates
• Expected returns
• Expectations about future business
conditions
• Technology
• Degree of excess capacity
• Business taxes
LO1
29-7
Government Spending
• Government spending increases
• Aggregate demand increases (as
•
LO1
long as interest rates and tax rates
do not change)
• More transportation projects
Government spending decreases
• Aggregate demand decreases
• Less military spending
29-8
Net Export Spending
• National income abroad
• Exchange rates
• Dollar depreciation
• Dollar appreciation
LO1
29-9
Aggregate Supply
• Total real output produced at each
•
LO2
price level
Relationship depends on time horizon
• Immediate short run
• Short run
• Long run
29-10
AS: Immediate Short Run
Price level
Immediate-short-run
aggregate supply
P1
0
ASISR
Qf
Real domestic output, GDP
LO2
29-11
Aggregate Supply: Short Run
AS
Price level
Aggregate supply
(short run)
0
Qf
Real domestic output, GDP
LO2
29-12
Aggregate Supply: Long Run
Price level
ASLR
Long-run
aggregate
supply
0
Qf
Real domestic output, GDP
LO2
29-13
Changes in Aggregate Supply
• Determinants of aggregate supply
• Shift factors
• Collectively position the AS curve
• Changes raise or lower per-unit
production costs
LO2
29-14
Changes in Aggregate Supply
AS3
AS1
Price level
AS2
0
Real domestic output, GDP
LO2
29-15
Input Prices
• Domestic resource prices
• Labor
• Capital
• Land
• Prices of imported resources
• Imported oil
• Exchange rates
LO2
29-16
Productivity
• Real output per unit of input
• Increases in productivity reduce
costs
• Decreases in productivity increase
costs
Productivity
=
Per-unit production cost
LO2
total output
total inputs
=
total input cost
total output
29-17
Legal-Institutional Environment
• Legal changes alter per-unit costs of
output
• Taxes and subsidies
• Extent of government regulation
LO2
29-18
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
510
512
96
507
514
92
502
AD
0
502
510 514
Real domestic output, GDP
(billions of dollars)
LO3
29-19
AD Increases: Demand-Pull Inflation
Price level
AS
P2
P1
AD2
AD1
0
Qf
Q1 Q2
Real domestic output, GDP
LO4
29-20
Decreases in AD: Recession
Price level
AS
P1
P2
b
a
c
AD1
AD2
0
Q1 Q2 Qf
Real domestic output, GDP
LO4
29-21
Decreases in AD: Recession
• Prices are downwardly inflexible
• Fear of price wars
• Menu costs
• Wage contracts
• Efficiency wages
• Minimum wage law
LO4
29-22
Decreases in AS: Cost-Push Inflation
Price level
AS2
AS1
b
P2
P1
a
AD
0
Q1 Qf
Real domestic output, GDP
LO4
29-23
Increases in AS: Full-Employment
Price level
AS1
P3
P2
P1
AS2
b
c
a
AD2
AD1
0
Q1
Q2 Q3
Real domestic output, GDP
LO4
29-24
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
29-25

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