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Key concepts chapters 9 – 12!
Homework Chapters 11-12 Chapter 11 - Bonus - Friday
January 27.
Chapter 12 - Bonus – Wednesday, February 1.
Tentative Test Day Friday, February 3rd.
Hold on here we go!!!
Key concepts chapters 9 – 12!
Homework Chapters 9-10-11-12 Test Day - Next Friday Approximate number of questions per chapter.
Chapter 9 – 10 Questions Keynesian Cross, MPC, Savings +
Consumption = DI
Chapter 10 – 10 Questions Simplified, Tax, and Balanced Budget
Multipliers
Chapter 11 – 25 Questions AD, AS, LRAS
Chapter 12 – 15 Questions Fiscal Policy: Expansion,
Contraction, Automatic, & Discretionary
Key concepts chapters 9 – 12!
Aggregate DemandAnd
Aggregate Supply
Aggregate DemandAnd
Aggregate Supply
CHAPTER ELEVEN
Key concepts chapters 9 – 12!
Aggregate Demand:Aggregate Demand:...the various amounts of goods andservices - the amounts of real output - that domestic consumers, businessesand foreign buyers collectively desireto purchase at each possible price level
Key concepts chapters 9 – 12!
Aggregate Demand:Aggregate Demand:...is downsloping because of:
Key concepts chapters 9 – 12!
Aggregate Demand:Aggregate Demand:
...is downsloping because of:
1 - Wealth Effect (Real Balances)A higher price level reduces the purchasing power of thegeneral public’s financial assets.
Remember the arbitrary and capricious nature of inflation???That one was for you Sean!
Key concepts chapters 9 – 12!
Aggregate Demand:Aggregate Demand:
...is downsloping because of:
1 - Wealth Effect (Real Balances)
2 - Interest-Rate EffectWhen the supply of money is fixed, as price levels rise interestrates increase because as the demand for $ increases the pricepaid for its use also increases.
Key concepts chapters 9 – 12!
Aggregate Demand:Aggregate Demand:...is downsloping because of:
1 - Wealth Effect (Real Balances)2 - Interest-Rate Effect3 - Foreign Purchases Effect
As prices go up in the U.S, our goods become more expensive,Thus reducing the amount of exports and increasing imports.
Agg
rega
te e
xpen
ditu
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(bill
ions
of
dolla
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0
0
Pric
e le
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GDP1
GDP1
P1
1
1’
(C a + I g + X n + G) 1 at P 1
Real GDP atReal GDP atprice level 1price level 1
Deriving the Aggregate Demand Curve
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP1
GDP1
P1
1
1’
(C a + I g + X n + G) 1 at P 1
Real GDP atReal GDP atprice level 1price level 1
What ifprices go
up?
What ifprices go
up?
Deriving the Aggregate Demand Curve
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP1
GDP1
P1
(C a + I g + X n + G) 1 at P 1
1
1’
P2
GDP2
GDP2
(C a + I g + X n + G) 2 at P 2
2
2’
A Lower RealA Lower RealGDP ExistsGDP Exists
at price level 2at price level 2
Deriving the Aggregate Demand Curve
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP1
GDP1
P1
(C a + I g + X n + G) 1 at P 1
1
1’
P2
GDP2
GDP2
(C a + I g + X n + G) 2 at P 2
2
2’
A Lower RealA Lower RealGDP ExistsGDP Exists
at price level 2at price level 2
What ifprices goup again?
What ifprices goup again?
Deriving the Aggregate Demand Curve
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP1
GDP1
P1
(C a + I g + X n + G) 1 at P 1
1
1’
P2
GDP2
GDP2
(C a + I g + X n + G) 2 at P 2
2
2’
(C a + I g + X n + G) 3 at P 3
3
P3
3’
A Still LowerA Still LowerReal GDP LevelReal GDP LevelExists at priceExists at price
level 3level 3
Deriving the Aggregate Demand Curve
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP1
GDP1
P1
(C a + I g + X n + G) 1 at P 1
1
1’
P2
GDP2
GDP2
(C a + I g + X n + G) 2 at P 2
2
2’
(C a + I g + X n + G) 3 at P 3
3
P3
3’
The Aggregate DemandThe Aggregate DemandCan Be ConstructedCan Be Constructed
Deriving the Aggregate Demand Curve
Deriving the Aggregate Demand Curve
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP1
GDP1
P1
(C a + I g + X n + G) 1 at P 1
1
1’
P2
GDP2
GDP2
(C a + I g + X n + G) 2 at P 2
2
2’
(C a + I g + X n + G) 3 at P 3
3
P3
3’
The Aggregate DemandThe Aggregate DemandCan Be ConstructedCan Be Constructed
0
Pri
ce le
vel
Real domestic output, GDP
CHANGES IN AGGREGATE DEMANDCHANGES IN AGGREGATE DEMAND
AD1
AD Can increase...AD Can increase...
0
Pri
ce le
vel
Real domestic output, GDP
CHANGES IN AGGREGATE DEMANDCHANGES IN AGGREGATE DEMAND
AD1
AD2
0
Pri
ce le
vel
Real domestic output, GDP
CHANGES IN AGGREGATE DEMANDCHANGES IN AGGREGATE DEMAND
AD1
AD Can decrease...AD Can decrease...
AD2
0
Pri
ce le
vel
Real domestic output, GDP
CHANGES IN AGGREGATE DEMANDCHANGES IN AGGREGATE DEMAND
AD1AD3
AD2
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealthConsumer wealth
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectationsConsumer expectations
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtednessConsumer indebtedness
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• TaxesTaxes
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes
Change in Investment SpendingChange in Investment Spending
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes
Change in Investment SpendingChange in Investment Spending• Interest ratesInterest rates
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes
Change in Investment SpendingChange in Investment Spending• Interest rates• Profit expectations on investment projectsProfit expectations on investment projects
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes
Change in Investment SpendingChange in Investment Spending• Interest rates• Profit expectations on investment projects• TechnologyTechnology
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes
Change in Investment SpendingChange in Investment Spending• Interest rates• Profit expectations on investment projects• Technology• Degree of excess capacity – Inventory!Degree of excess capacity – Inventory!01020304050607080901st Qtr2nd Qtr3rd Qtr4th Qtr
EastWestNorth
Key concepts chapters 9 – 12!
Change in Government SpendingChange in Government Spending
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Key concepts chapters 9 – 12!
Change in Government SpendingChange in Government Spending
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Net Export SpendingChange in Net Export Spending
Key concepts chapters 9 – 12!
Change in Government SpendingChange in Government Spending
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Net Export SpendingChange in Net Export Spending
• National income abroadNational income abroad
Key concepts chapters 9 – 12!
Change in Government SpendingChange in Government Spending
DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND
Change in Net Export SpendingChange in Net Export Spending
• National income abroad• Exchange ratesExchange rates
illustrated...illustrated...
Changes in the Aggregate Demand Curve
Agg
rega
te e
xpen
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(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP1
GDP1
P1
(C a + I g + X n + G) 1 at P 1
An Increase inAn Increase inAggregate DemandAggregate Demand
An IncreaseAn Increasein Aggregatein AggregateExpendituresExpenditures
AD1
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
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vel
GDP1
GDP1
P1
(C a + I g + X n + G) 2 at P 1
GDP2
GDP2
(C a + I g + X n + G) 1 at P 1
An Increase inAn Increase inAggregate DemandAggregate Demand
An IncreaseAn Increasein Aggregatein AggregateExpendituresExpenditures
AD1
AD2
Changes in the Aggregate Demand Curve
Key concepts chapters 9 – 12!
Aggregate Supply:...the level of real domestic output which will be produced at eachprice level
Key concepts chapters 9 – 12!
Aggregate Supply:...has three ranges:
Key concepts chapters 9 – 12!
Aggregate Supply:...has three ranges:
1 - Horizontal Range1 - Horizontal Range
Key concepts chapters 9 – 12!
Aggregate Supply:...has three ranges:
1 - Horizontal Range
2 - Vertical Range2 - Vertical Range
Key concepts chapters 9 – 12!
Aggregate Supply:...has three ranges:
1 - Horizontal Range
2 - Vertical Range
3 - Intermediate (Upsloping) Range3 - Intermediate (Upsloping) Range
Pric
e le
vel
Real domestic output, GDP
PP
HorizontalHorizontalRangeRange
Upsloping orUpsloping orIntermediateIntermediate
RangeRange
VerticalVerticalRangeRange
As developed in chapter 8...As developed in chapter 8...
Pric
e le
vel
Real domestic output, GDP
PPAn Increase in Aggregate SupplyAn Increase in Aggregate Supply
AS1
Pric
e le
vel
Real domestic output, GDP
PP AS1AS2
An Increase in Aggregate SupplyAn Increase in Aggregate Supply
Pric
e le
vel
Real domestic output, GDP
PP AS1AS2
A Decrease in Aggregate SupplyA Decrease in Aggregate Supply
Pric
e le
vel
Real domestic output, GDP
PP AS1AS2AS3
A Decrease in Aggregate SupplyA Decrease in Aggregate Supply
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLYWhen per unit production costs change firms will alter the amount they produce at each level. What would cause the per unit production costs to change?
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesChange in Input Prices
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability
• LandLand
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability
• LandLand• LaborLabor
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability
• LandLand• LaborLabor• Capital – (Expectations)Capital – (Expectations)
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability
• LandLand• LaborLabor• CapitalCapital• Entrepreneurial abilityEntrepreneurial ability
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability
• LandLand• LaborLabor• CapitalCapital• Entrepreneurial abilityEntrepreneurial ability
Change in Productivity Change in Productivity
Key concepts chapters 9 – 12!
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability
• LandLand• LaborLabor• CapitalCapital• Entrepreneurial abilityEntrepreneurial ability
Change in Productivity Change in Productivity
Productivity =real output
input
Key concepts chapters 9 – 12!
Change in legal-Change in legal-institutional institutional environmentenvironment
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Key concepts chapters 9 – 12!
Change in legal-Change in legal-institutional institutional environmentenvironment• Business taxes and subsidiesBusiness taxes and subsidies
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Key concepts chapters 9 – 12!
Change in legal-Change in legal-institutional institutional environmentenvironment• Business taxes and subsidiesBusiness taxes and subsidies
• Government regulationGovernment regulation
DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY
Pric
e le
vel
Real domestic output, GDP
PP
The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level
and the Equilibrium Real GDPAS
AD
Equilibrium in theEquilibrium in theintermediate rangeintermediate range
QeQ1 Q2
Pric
e le
vel
Real domestic output, GDP
PP
The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level
and the Equilibrium Real GDPAS
AD
Equilibrium in theEquilibrium in thehorizontal rangehorizontal range
QeQ1 Q2
Pric
e le
vel
Real domestic output, GDP
PP
The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level
and the Equilibrium Real GDPAS
Equilibrium in theEquilibrium in thehorizontal rangehorizontal range
Q1
AD1
Pric
e le
vel
Real domestic output, GDP
PP
The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level
and the Equilibrium Real GDPAS
Equilibrium in theEquilibrium in thehorizontal rangehorizontal range
Q1
AD1
AD2
Q2
Pric
e le
vel
Real domestic output, GDP
PP
The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level
and the Equilibrium Real GDPAS
Equilibrium in theEquilibrium in theintermediate rangeintermediate range
Q1
AD1
P1
Pric
e le
vel
Real domestic output, GDP
PP
The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level
and the Equilibrium Real GDPAS
AD2
Equilibrium in theEquilibrium in theintermediate rangeintermediate range
Q1 Q2
AD1
P1
P3
Pric
e le
vel
Real domestic output, GDP
PP
The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level
and the Equilibrium Real GDPAS
P1
Equilibrium in theEquilibrium in thevertical rangevertical range
Qc
AD1
P5
Pric
e le
vel
Real domestic output, GDP
PP
The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level
and the Equilibrium Real GDPAS
P1
AD2
Equilibrium in theEquilibrium in thevertical rangevertical range
Qc
AD1
P5
P6
Pric
e le
vel
Real domestic output, GDPQQ
PP
The Multiplier withPrice Level ChangesThe Multiplier withPrice Level Changes
AS
AD2
GDP1 GDP2
AD1
P1
P3
GDP3
}}
FullMultiplier
FullMultiplier
ReducedMultiplierReducedMultiplier
Pri
ce le
vel
Real domestic output, GDP
PP
The Ratchet EffectThe Ratchet EffectAS
AD2
Q1Q2
P1
P3
Q3
AD1 / 3
Why the ratchet?
next...a
bc
Illustratesthe down-wardinflexibilityof prices.
Key concepts chapters 9 – 12!
Causes
Causes
The Ratchet EffectThe Ratchet Effect
Key concepts chapters 9 – 12!
Causes
Causes
• Wage Contracts• Wage ContractsThe Ratchet EffectThe Ratchet Effect
Key concepts chapters 9 – 12!
Causes
Causes
• Wage Contracts• Morale & Productivity• Wage Contracts• Morale & Productivity
The Ratchet EffectThe Ratchet Effect
Key concepts chapters 9 – 12!
Causes
Causes
• Wage Contracts• Morale & Productivity
• Efficiency Wages
• Wage Contracts• Morale & Productivity
• Efficiency Wages
The Ratchet EffectThe Ratchet Effect
Key concepts chapters 9 – 12!
Causes
Causes
• Wage Contracts• Morale & Productivity
• Efficiency Wages• Training Investments
• Wage Contracts• Morale & Productivity
• Efficiency Wages• Training Investments
The Ratchet EffectThe Ratchet Effect
Key concepts chapters 9 – 12!
Causes
Causes
• Wage Contracts• Morale & Productivity
• Efficiency Wages• Training Investments• Minimum Wage
• Wage Contracts• Morale & Productivity
• Efficiency Wages• Training Investments• Minimum Wage
The Ratchet EffectThe Ratchet Effect
Key concepts chapters 9 – 12!
Causes
Causes
• Wage Contracts• Morale & Productivity
• Efficiency Wages• Training Investments• Minimum Wage• Menu CostsMenu Costs
• Wage Contracts• Morale & Productivity
• Efficiency Wages• Training Investments• Minimum Wage• Menu CostsMenu Costs
The Ratchet EffectThe Ratchet Effect
Key concepts chapters 9 – 12!
Causes
Causes
• Wage Contracts• Morale & Productivity
• Efficiency Wages• Training Investments• Minimum Wage• Menu Costs• Fear of Price WarsFear of Price Wars
• Wage Contracts• Morale & Productivity
• Efficiency Wages• Training Investments• Minimum Wage• Menu Costs• Fear of Price WarsFear of Price Wars
The Ratchet EffectThe Ratchet Effect
Pric
e le
vel
Real domestic output, GDP
PPShifting Aggregate SupplyShifting Aggregate Supply
AS1 AS3AS2
AD1
a
b
c
Q1Q2
P1
P2
Q3
P3
Cost-pushCost-pushinflationinflation
EconomicEconomicGrowthGrowth
Pric
e le
vel
Real domestic output, GDP
PPShifting Aggregate SupplyShifting Aggregate Supply
AS1 AS3AS2
AD1
a
b
c
Q1Q2
P1
P2
Q3
P3
Cost-pushCost-pushinflationinflation
ANYQUESTIONS?
ANYQUESTIONS?
aggregate demandaggregate demand wealth effectwealth effect interest-rate effectinterest-rate effect foreign purchases foreign purchases
effecteffect determinants of determinants of
aggregate demandaggregate demand aggregate supplyaggregate supply horizontal rangehorizontal range vertical rangevertical range
aggregate demandaggregate demand wealth effectwealth effect interest-rate effectinterest-rate effect foreign purchases foreign purchases
effecteffect determinants of determinants of
aggregate demandaggregate demand aggregate supplyaggregate supply horizontal rangehorizontal range vertical rangevertical range
intermediate rangeintermediate range determinants of determinants of
aggregate supplyaggregate supply productivityproductivity equilibrium price levelequilibrium price level equilibrium real domestic equilibrium real domestic
outputoutput ratchet effectratchet effect efficiency wagesefficiency wages menu costsmenu costs
intermediate rangeintermediate range determinants of determinants of
aggregate supplyaggregate supply productivityproductivity equilibrium price levelequilibrium price level equilibrium real domestic equilibrium real domestic
outputoutput ratchet effectratchet effect efficiency wagesefficiency wages menu costsmenu costs
Key concepts chapters 9 – 12!
Coming next....Coming next....FISCALPOLICY
Chapter 12Chapter 12
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