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Lecture 9Aggregate Demand & Aggregate Supply
(Part 1)(Ch:20; P..!.")
"C 10#
$aculty: A%' Chdhury
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An ecnmy e*perence% +uctuatn% n t%le,el ' act,te% durng d-erent
perd%.n %me year% prductn le,el are hgh &e,entually %tandard '
l,ng % al% hgh.
/e,er n ther year% utput le,el 'all%unemplyment r%e% & ncme
le,el 'all%( eal DP 'all%).
Recession: Perd% ' 'allng ncme &r%ng unemplyment.
Depression: A %e,ere 'rm ' Recession.
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n rder t under%tand %uch +uctuatn%,ara3le% l4e DP 5nemplyment
ntere%tate% & Prce Le,el% are analy6ed. 7e ha,ealready l4ed nt
the%e ,ara3le% pre,u%lyhe,er the pre,u% analy%% ere 3a%ed n along
run tme 'rame. Current analy%% llcn%der %hrt run +uctuatn% n
the%e,ara3le%. 8he%e %hrt run +uctuatn% ccur%
arund ther lng run trend%. 8he mdel 'Aggregate Demand &
Aggregate Supply % u%edt under%tand %uch %hrt run +uctuatn%.
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Such +uctuatn% n an ecnmy % called Business Cycle, %nce the%e
+uctuatn%change% the 3u%ne%% cndtn% n the
ecnmy. 7hen utput ( eal DP) %grng rm% ma4e mre %ale% &
ma4e%hgher prt. /e,er hen eal DP 'all%rm% ma4e% le%%er %ale% &
prt al% ge%
dn. u%ne%% Cycle% are nt regular &predcta3le a% the name
%ugge%t they arerregular & dcult t predct accurately.
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A% mentned pre,u%ly ,ara3le% l4e DPunemplyment ntere%t rate
& prce le,el arecn%dered hle analy6ng %hrt run
+uctuatn%. 8he pre,u% analy%% ' the%e,ara3le% ere 3a%ed n the
plat'rm% ' thet Cla%%cal "cnmc% cncept%: ClassicalDichotomy &
Monetary Neutrality. 7e ha,e
%een that real ,ara3le% l4e eal DP5nemplyment eal ntere%t ate%
eredetermned thut the n+uence ' nmnal,ara3le% l4e mney %upply &
prce le,el.
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/e,er ther ecnm%t 3ele,e thatthe%e t cla%%cal ecnmc% cncept%nly
apply n the lng run. 8 under%tand
%hrt run +uctuatn% the analy%% ha% tdepart 'rm Monetary
Neutrality &Classical Dichotomy %nce n the %hrtrun mney %upply
can n+uence real,ara3le% & 3th nmnal & real ,ara3le%nteract
tgether n the %hrt run.
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e ggregateDemand & Aggregate
Supply: 8h% mdel cm3ne% utput ' gd%& %er,ce% a% repre%ented
3y ealDP ( real ,ara3le) & a,erage prce
le,el a% repre%ented 3y DP De+atrr CP ( nmnal ,ara3le).8h%
mdell4% at %hrt run +uctuatn% n
ecnmc act,te% arund t% lngrun trend.
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Cmpnent% ' the ADu%t t 3rng AD & AS nt e=ul3rum.
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Aggregate Demand (AD):
Aggregate Demand (AD) cur,e % dnard%lpng.
7hy the AD Cur,e %lpe% dnard: 3y
3rea4ng dn the AD nt t% cmpnent% part%& then analy6ng each
cmpnent e can get amacrecnmc per%pect,e ' hy AD cur,e %dnard
%lpng:
? @ C BC repre%ent% /u%ehld% repre%ent% rm%
repre%ent% ,ernment "*pendture Brepre%ent% Bet "*prt%.
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o8he Prce Le,el & Cn%umptn: 8he7ealth "-ect
o8he Prce Le,el & ntere%t: 8hentere%t
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7hy the Aggregate Demand(AD) cur,e mght %h't:
o Sh't% Ar%ng $rm Change nCn%umptn
o Sh't% Ar%ng $rm Change nn,e%tment
o Sh't% Ar%ng $rm Change n,ernment Purcha%e
o Sh't% Ar%ng $rm Change n Bet"*prt%.
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8he Aggregate Supply (AS)Cur,e:
8he relatn%hp 3eteen AS & prcele,el depend% n the tme hr6n
eare tal4ng a3ut. n the %hrt run AS %
related t prce & % upard %lpng nthe lng run AS cur,e %
unre%pn%,e tprce & % ,ertcal. n rder t
under%tand %hrt run ecnmc+uctuatn% e ha,e t l4 at 3th the%hrt
run & lng run Aggregate Supply.
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7hy % the lng run AScur,e ,ertcal:
o n the lng run an ecnmy% utput (eal DP) %dened 3y the 'llng
'unctn:
? @ 'A (E L B)
? @ utput
A@ 8echnlgy
E@ Phy%cal Captal /uman captal
L@ La3r
B@ Batural e%urce
/ence n the lng run AS de%nt re%pnd t prce & %,ertcal. 8he
lng run AS actually %upprt% 3th theCla%%cal Dchtmy & !netary
Beutralty there%.
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7hy the lng run AS mght%h't:
Batural ate ' utput: the prductn 'gd% & %er,ce% n an ecnmy n
thelng run hch % ache,ed at a natural
rate ' unemplyment. 8he ecnmy lle,entually m,e tard% th% lng
runnatural rate ' utput le,el.
Any change% n the 'actr% hchdetermne% lng run utputFlng run
AScan %h't the lng run AS cur,e:
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Sh't% Ar%ng $rm Change n La3r: n+ nt ther4'rce ut+ ut ' the
r4'rce & al% change% nthe natural rate ' unemplyment.
Sh't% Ar%ng 'rm Change n Captal: ncrea%e r decrea%en the captal
%tc4 ncludng 3th phy%cal captal & humancaptal.
Sh't% Ar%ng 'rm Change% n Batural e%urce : ncrea%e nthe le,el '
natural re%urce ad,er%e e-ect ' naturalre%urce l4e eather.
Sh't% Ar%ng 'rm Change% n 8echnlgcal Enledge:help% t prduce mre
utput th %ame le,el ' ther nputre%urce%. nternatnal tradng 3a%ed n
%pecal6atn &cmparat,e ad,antage al% ha% %mlar e-ect
l4etechnlgcal prgre%%.
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AD & AS depctng lng runrth & n+atn:
AD %h't 'actr l4e mnetary plcy n,l,ngra%ng mney %upply & AS
%h't 'actr l4etechnlgcal prgre%% are cn%dered t 3e them%t mprtant
%h't 'actr% amng many. ,er
tme ra%ng mney %upply & cntnuu%technlgcal prgre%% ll 4eep n
%h'tng theAD & AS cur,e thu% changng & ra%ng theecnmyG%
le,el ' natural rate ' utput and al%
general prce le,el ( rth & n+atn.) 8he %hrtrun ecnmc
+uctuatn% ta4e% place arundthe%e lng run trend% ' utput grth &
n+atn.
