Transcript ADAS - YSU
Chapter 24 Aggregate Demand and Aggregate Supply 1 The Aggregate Demand Curve • • • • When price level rises, money demand curve shifts rightward. Consequently, interest rate is higher, given fixed money supply. Then, aggregate expenditure decreases (AE line shifts downward). As a result, the equilibrium GDP becomes lower. So, a rise in price level causes a decrease in equilibrium GDP. The aggregate demand curve shows the negative relationship between price levels and equilibrium real GDP. 2 Figure 1: Deriving the Aggregate Demand Curve 3 Understanding the AD Curve • Each point on the AD curve represents a short-run equilibrium in economy • The AD curve is different from a demand curve for one particular product 4 Movements of the AD Curve • Moving along the AD curve whenever price level changes. • When anything other than price level cause equilibrium GDP to change, the AD curve shifts. – – – – – – – Government purchasing Taxes Autonomous consumption spending Investment spending Net exports Money supply Expectations 5 Figure 2: A Spending Shock Shifts the AD Curve 6 Costs and Prices • To understand how macroeconomic events affect the price level, we assume – A firm sets price of its products as a markup over cost per unit – So, in the short-run, price level rises when there is an economywide increase in unit costs • Labor costs • Costs of natural resources • How an increase in output level raises the price level? – As output increases, demand for inputs rises. – As unit cost increases, price level ( assumed as a markup over unit cost) rises. 7 Figure 3: The Aggregate Supply Curve 8 Movements of the AS Curve • When price level changes due to a change in real GDP, the change happens along the AS curve • When the change of price level is caused by any factor other than real GDP, the AS curve shifts – – – – Oil prices Weather Technological change Nominal wage 9 Figure 4: Shifts of the Aggregate Supply Curve Price Level AS 2 140 L 100 A 10 AS1 Real GDP ($ Trillions) 10 Figure 5: Short-Run Macroeconomic Equilibrium 11 Figure 6: The Effect of a Demand Shock Price Level AS 130 H 100 J E AD2 AD1 10 12 13.5 Real GDP ($ Trillions) 12 An Increase in Government Purchases – When G , AD curve shifts rightward. As a result, real GDP , given price level is fixed – However, when real GDP , unit cost , so price level – Furthermore, as price level , Md and interest rate , which causes aggregate expenditure to decrease – In the end, real GDP increases by less than horizontal shift in AD curve 13 An Increase in the Money Supply • Can you demonstrate how an increase in the money supply affects the real equilibrium GDP? 14 Demand Shocks • A positive demand shock—shifts AD curve rightward – Increases both real GDP and price level in short-run • A negative demand shock—shifts AD curve leftward – Reduces both real GDP and price level in shortrun 15 Examples • The Great Depression 1929 – 1933 – Negative demand shocks • Oil Crisis 1973 (began on October 17) – Negative supply shocks 16 Demand Shocks: Adjusting to the LongRun • In short-run, wage rate is treated as given. • But in long-run, wage rate can change. – When output is above full employment, wage rate will rise, shifting AS curve upward – When output is below full employment, wage rate will fall, shifting AS curve downward 17 Figure 7: The Long-Run Adjustment Process After A Positive Demand Shock Price Level Long-Run AS Curve AS2 AS1 P4 K J P3 P2 P1 H E AD2 AD1 YFEY3Y2 Real GDP 18 Figure 8: Long-Run Adjustment After A Negative Demand Shock 19 Figure 9: The Effect of a Supply Shock 20 More examples • 1990-91 recession – Oil supplies and price of oil • 2001 recession – Money supply and interest rate 21