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Aggregate Demand, Aggregate Supply
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HOW CAN WE ANALYZE ECONOMIC FLUCTUATIONS?
Aggregate Demand and Aggregate Supply
The History of Recessions in the US
Aggregate Demand
REAL GDP
AND
PRICE LEVELS
Aggregate demand curve shows the relationship between: Aggregate spending on domestic
output (X AXIS) Average price levels (Y AXIS)
What does this look like?
Why is it downward sloping? Foreign Sector Substitution effect:
If prices rise domestically Look internationally
If prices fall domestically Buy more domestically
Why is it downward sloping? Interest rate effect:
If prices rise Need to borrow more Interest rates rise
I falls C falls
If prices fall Need to borrow less
Interest rates fall I increases C increases
Why is it downward sloping? The Wealth effect:
If price rises The purchasing power falls
The quantity of domestic output demanded falls
SHIFTs IN THE AD Consumption will…
Investment will…
Increase AD if… Decrease AD if…More wealth Less wealthMore optimistic Less optimisticLess taxes More taxes
Increase AD if… Decrease AD if…Lower real interest rate Higher real interest rateHigher expected returns Lower expected returns• Due to future expectations about profitability
AD SHIFTS: G and NX (X-M)
Increase AD with more spending
Decrease AD with less spending
Increase AD if…
Decrease AD if…
Strong Dollar(more imports, less exports)
Weak Dollar(more exports, less imports)
Strong Foreign Economies(we export more)
Weak Foreign Economies(we export less)
Government spending will Net Exports
Representations of Shifts in the AD
Increase of AD (right) Decrease in AD (left)
Governmental Policies
Taxes Can increase or
decrease C and I Government
Spending Increase G
Increase Money More C and More I
Decrease Money Less C and Less I
Fiscal Policy Monetary Policy
Presentation Guidelines 1. Establish roles: (see back board) 2 min. 2. Read your excerpt and fill in WS. 5 min. 3. Find another credible source for info. 5
min. 4.Create your presentation of information
and include: 15 min. Description of your concept (50 points) Graphs or image of your concept (20 points) Jingle, rap, acronym, or dance to remember
your concept (20 points) Creativity (10 points)
Aggregate Supply
PL
And
Real GDP
Shows the relationship between average price level and the domestic output produced
SHORT RUN VS. LONG RUN
Input $ do not adjust to changes in the PL Keynesian school
Input $ are flexible and adjust to changes in PL Classical school
SHORT RUN: PD. OF TIME WITH STICKY PRICES (COSTS) AND WAGES
LONG RUN: PD. OF TIME WHEN PRICES (COSTS)
AND WAGES ARE FLEXIBLE
Short-Run Aggregate Supply (SRAS)
PL
GDPR
SRAS
As prices increase Firms produce more for a greater profit
As prices decreasesales will fall, and producers produce less
INPUT COSTS ARE STUCK AT A PRE-DETERMINED LEVEL
HOW TO SHIFT THE SRAS
• INPUT PRICES or COSTS such as WAGES•ECONOMIC GROWTH•GOVERNMENT REGULATION
INCREASE AND DECREASE IN SRAS
DECREASE IN INPUT COSTS
INCREASE IN INPUT COSTS
PL
GDPR
SRASSRAS1P
L
GDPR
SRAS
SRAS1PL
Long-Run Aggregate Supply (LRAS)
PL
GDPR
LRAS
Yf
HOW TO SHIFT THE LRAS LIKE THE PPF
In the Long run, we are operating at Full Potential so…
CHANGE IN TECHNOLOGYCHANGE IN LABOR PRODUCTIVITY
CHANGE IN CAPITAL
THE DIFFERENT MODELS… http://apecon.us/aggregatesupplykeynes
ianclassical2.swf
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