Transcript AP Macroeconomics - Katy Independent School District

AP Macroeconomics
The AS/AD Model
The AS/AD Model
• The equilibrium of SRAS & AD determines
current output (GDPR) and the price level
(PL)
• If equilibrium of SRAS & AD is ON LRAS:
– Unemployment is ~5%
– Output is where it “should” be
– Also at a point ON the PPC
Full Employment
• Full Employment equilibrium exists where
AD intersects SRAS & LRAS at the same
point.
PL
LRAS
SRAS
P
AD
YF
GDPR
Recessionary Gap
• A recessionary gap exists when equilibrium
occurs below full employment output.
SRAS
LRAS
PL
P
AD
Y
YF
GDPR
Inflationary Gap
• An inflationary gap exists when equilibrium
occurs beyond full employment output.
PL
LRAS
SRAS
P
AD
YF Y
GDPR
Changes (Δ) in AD
• Δ Consumption (C)
– C↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– C↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Gross Private Investment (IG)
– IG↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– IG↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Changes (Δ) in AD (cont)
• Δ Government Spending (G)
– G↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– G↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Net Exports (XN)
– XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Increase in AD
LRAS
PL
SRAS

P

P1
AD1
AD

Y
YF
GDPR
C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
Decrease in AD
LRAS
PL
SRAS

P

P1
AD
AD1

YF
Y
GDPR
C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Changes (Δ) in SRAS
• Δ Input Prices
– Input Prices↓ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
– Input Prices↑ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
• Δ Productivity
– Productivity↑ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
– Productivity↓ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
Changes (Δ) in SRAS (cont)
• Δ Regulation
• Deregulation .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
– Regulation .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
Which determinant of SRAS was not covered in the notes?
Correct—Bt
Write what will happen if business taxes go down
SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Increase in SRAS
SRAS
LRAS
PL
SRAS1

P

P1
AD

Y
YF
GDPR
Input Prices↓, Productivity↑, and/or Deregulation
.: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Decrease in SRAS
SRAS1
LRAS
PL
SRAS

P

P1
AD

Y1
YF
GDPR
Input Prices↑, Productivity↓, and/or Regulation/Business
Taxes ↑
.: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑
SRAS / AD Summary
• ΔC, ΔIG, ΔG, and/or ΔXN = Δ AD
– AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
– AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Input Prices, Δ Productivity,
and/or Δ Regulation = Δ SRAS
– SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
– SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
• Increase in G with an increase in Taxes
increases AD. (Multiplier)
• The AS/AD Model is the most important
graph in AP Macroeconomics.
• KNOW IT!!!
• Scenarios:
– Assume the US economy is in a state of full
employment.
– Draw a correctly labeled AS/AD graph
representing that fact.
– Now suppose that private investment
decreases. Show the effect of that decrease
on your AS/AD graph.
– Explain the impact of the decrease in private
investment.
Long-Run Aggregate Supply
(LRAS)
• scenario to illustrate the point that we will
always (hopefully) come back to LRAS and
why/how LRAS is independent of price level
• To produce more than full employment
output overtime may be necessary.
• Input costs (labor) will go up
• When input costs are free to change, the
high demand for them will start to raise
input costs and lead to cost push inflation
Long-Run Aggregate
Supply (LRAS)
• As input prices increase firms profits will fall
until rise in input prices match the change
in output prices.
• Firm profits return to original levels and firms
will be motivated to produce at FE output
level