Transcript National Income and the Price Level in the Short Run

Chapter 31 - Lipsey
EXOGENOUS CHANGES IN THE PRICE LEVEL
SHIFTS IN THE AE CURVE
• in the price level: AE curve shifts downward,
• in the price level: AE curve shifts upward.
•In other words, the price level and AE are negatively
related to each other.
CHANGES IN CONSUMPTION
Inside Assets: issued by someone in private sector but
held by someone else in private sector.
Outside Assets: held by someone in private sector but
issued by someone outside that sector.
CHANGES IN NET EXPORTS function downward
in P shifts net exports
CHANGES IN EQUILIBRIUM INCOME (Fig. 31.1)
in Price Downward shift in AE
in real
national income.
in Price Upward shift in AE
in real national
income.
THE AGGREGATE DEMAND CURVE (Fig. 31.2)
in P leads to a new AE curve and hence a new level of
income. Each combination of price & income becomes a
particular point on the AD curve.
–Slope of the AD curve
–Points off the AD curve (fig.31.3)
–Shifts in the AD curve
–The simple multiplier and the AD curve (31. 4)
EQUILIBRIUM NATIONAL INCOME & THE
PRICE LEVEL
THE AGGREGATE SUPPLY CURVE
Relates aggregate supply to the price level
2 TYPES
• Short-Run Aggregate Supply Curve (SRAS) – fig 31.5
– Assumption: prices of all factors of production remain
constant.
• Long-Run Aggregate Supply Curve (LRAS)
– Relates price and output after the economy has fully
adjusted to that price level.
THE SLOPE OF THE SRAS CURVE
• Costs & Output: are positively related.
• Prices & Output: positively associated due to
actions of price-takers and prices-setters .
• Real & Nominal Wages: in the price and output
level is associated with a fall in real wage i.e. a
rise in the price of output relative to input prices.
SHIFTS IN THE SRAS CURVE
• Also known as aggregate supply shocks
• Two important sources
– Change in input prices
– Increase in productivity
MACROECONOMIC EQUILIBRIUM – fig 31.7
Refers to equilibrium values of national income
and the price level, as determined by the
intersection of the AD and SRAC curves.
•Shifts in AD also known as Aggregate Demand
shocks (fig 31.8)
•Shifts in SRAS also known as Aggregate supply
shocks (fig 31.12)
•These shocks change the equilibrium level of
income and price.
CHANGES IN NATIONAL INCOME & THE
PRICE LEVEL
• The division of effect between P and Y depends on
the shape of the SRAS curve
• When SRAS is positively sloped:
– AD shocks cause P and Y to move in same direction.
– The multiplier is smaller than the simple multiplier.
• When SRAS is flat: shifts in AD primarily affect Y.
• When SRAS is steep: shifts in AD primarily affect P.
CHANGES IN NATIONAL INCOME & THE
PRICE LEVEL
• An aggregate supply shock moves equilibrium Y
along the AD curve, causing the P and Y to move
in opposite directions.
• A left-ward shift in the SRAS curve causes
stagflation i.e. P and Y.
• A right-ward shift in the SRAS curve causes an
in Y and a in P.
• The division of effect of a shift in SRAS between a
change in Y and P depends on the shape of the
AD curve.