Transcript What is Macroeconomics? - The Bronx High School of Science

Aim: What is
Macroeconomics
and AD?
Roots of Macroeconomics
• The Great Depression
• Classical economists believed that
the economy was self correcting
• Keynes believes that aggregate
demand determines
unemployment, not price and
wages
Recent Macroeconomic History
• Fine Tuning: 1960s
• Disillusionment
– Recessions: 1974-1975, 1980-1981
– High Inflation: 1974-1975 & 1979-1981
– Moderate Recession 1990-1991
– Stagflation – overall price level rising
during recessionary periods
• Good Times: 1990s into next century
Macroeconomic Concerns
• Aggregate price level – inflation
• Aggregate output – production of
goods and services
• Total Employment
• International economy’s
relationship to the domestic
economy
The Role of Government in the
Macro economy
• Fiscal Policy
• Monetary Policy
• Income Policies – direct attempt by the
govt to control prices and wages
• Supply-Side Policies – use tax system
to increase production – trickle down
economics
Components of Aggregate Demand
• Measures the relationship between
spending & income: components of
spending which make up the AD model
are consumption, investment and
savings
• The AD reflects the changes in demand
when the price level for all goods and
services increases or decreases
• When the general price level
increases we do not substitute one
good for another, rather we as a
nation buy less goods and services
• The substitutes in this case are
money financial assets, good and
services in the future and imports.
• Economists identify three primary
effects that increase real GDP when the
price level decreases and decrease real
GDP when the price level increases.
These effects explain why a given AD
curve has a negative slope:
– Real Wealth or Real Balance Effect
– Foreign Trade Effect
– Interest Rate Effect
AD curve shifts right when
• Consumption increases as a result
from
– Expectations of inflation or
shortages in the future
– Increased incomes or wealth
– Optimism about jobs and income
• Investment increases when
– Interest rates drop
– Investors gain optimism
• Government carries out expansionary
policy such as
– Increase in spending
– Increase in the money supply
– Decrease in taxes
• Net exports increase when
– Exchange rate decreases (imports decrease)
– Foreign income increases (exports decrease)
Aggregate Supply
• indicates the total value of output
producers are willing and able to
supply at alternative price levels in a
given period
• Short-Run AS – flat depression range, a
positively sloped intermediate range, and a
vertical physical limit
– horizontal range: large inventories and
excess capacity, suppliers would be happy to
sell more output at the existing price level,
workers are plentiful & the economy can
increase output without placing upward
pressure on prices or wages
– intermediate range: positive slope, normal
range of operation, no excess inventories,
gives firms the incentive they need to
increase employment and produce more
goods and services
–vertical range: when factories cannot
run any faster and workers cannot
work any more overtime – the
economy has reached its physical
limit for output, the economy
reaches full employment
• Long-Run AS – no cyclical
unemployment, increases of output do
not place upward pressure on wages
and other input prices
AS curve shifts right when
• Inputs become cheaper, more productive or
more plentiful as with
– new discoveries of raw materials
– increases in the labor supply
– decreases in wages or other input prices
– improvements in education or training
– decreased inflationary expectations
– increased investment – more capital
– technological advances
• Government policies reduce
production costs as with
– tax cuts
– deregulation
– reform in welfare or unemployment
insurance programs
• Weather is good and or macro
disturbances cease such as
– wars
– natural disasters