Transcript Power Point A. Supply & A. Demand

Aggregate Demand and
Aggregate Supply
AP Econ. - Leader
Aggregate Demand
• Aggregate Demand
refers to the quantity
demanded of goods and
services, or the quantity
demanded of the Real
GDP, at various price
levels.
Aggregate Demand
• The sum of all expenditure in the economy over a period of
time
• Macro concept – WHOLE economy
• Formula:
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–
–
–
AD = C+I+G+(X-M)
C= Consumption Spending
I = Investment Spending
G = Government Spending
(X-M) = difference between spending on imports and
receipts from exports (Balance of Payments)
Aggregate Demand Curve
• The curve is downward sloping,
indicating an inverse relationship
between the price level and the
quantity demanded of Real
GDP: as the price level rises, the
quantity demanded of Real GDP
falls, and as the price level falls,
the quantity of GDP demanded
of Real GDP rises.
Why the Aggregate Demand
Curve Slopes Downwards
• The Real Balance effect states that the inverse
relationship between the price level and the
quantity demanded of Real GDP is established
through changes in the value of monetary wealth.
• A fall in the price level causes purchasing power
to rise, which increases a person’s Monetary
Wealth. As people become wealthier, the
quantity demanded from the GDP rises.
• A rise in the price level causes Purchasing Power
to fall which decreases a person’s monetary
wealth.
Why the Aggregate Demand
Curve Slopes Downwards Cont.
• The Interest Rate Effect states that the inverse
relationship between the price level and the quantity
demanded of Real GDP is established through changes
in household and business spending that is sensitive to
changes in interest rates.
A Change in the Quantity
Demanded of Real GDP versus a
Change in Aggregate Demand
• A Change in the quantity demanded of Real GDP
is brought about by a change in the price level.
This would cause a shift down the Aggregate
Demand Curve, but would not move the curve.
• A Change in Aggregate Demand is a shift in the
Aggregate Demand Curve. An increase is a right
shift of the curve, while a decrease in Aggregate
Demand would cause a left shift to the curve.
A Shift in the Aggregate Demand
Curve
Changes in Aggregate Demand
• If at a given price level, Consumption,
Investment, Government Purchases, or Net
Exports INCREASE, then Aggregate
Demand will INCREASE as well.
• If at a given price level, Consumption,
Investment , Government Purchases, or Net
Exports DECREASE, the Aggregate
Demand will DECREASE as well.
How Spending Can Affect
Aggregate Demand
• Components of Spending:
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Consumption
Investment
Government Purchases
Net Exports
• A change in some or all of these
components can affect aggregate
demand.
What Causes Consumption to
Increase?
– Tax rates (Fiscal Policy)
– Incomes – short term and
expected income over lifetime
– Wage Increases
– Credit
– Interest Rates (Monetary Policy)
– Wealth
• Property
• Shares
• Savings
• Bonds
What Causes Investment to
Increase?
• Spending on:
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–
–
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Machinery
Equipment
Buildings
Infrastructure
• Influenced by:
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–
–
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Expected rates of return
Interest rates
Expectations of future sales
Existing Stock / Physical Capital
Increase Government Spending?
•
•
•
•
•
•
•
•
Healthcare
Social Welfare
Education
Foreign Aid
Regions
Industry
Law and Order
National Def.
What Would Increase Net
Exports?
• Foreign Real National
Income: As exports rise,
net exports rise, and so
does the Real GDP. They
can afford to buy more
from us.
• Exchange Rate: whether
or how far a different
monetary unit has
appreciated or depreciated
when compared to your
own monetary units.
Short Run Aggregate Supply
• The quantity supplied of
all goods and services in
an economy at different
price levels.
• The Short Run Aggregate
Supply Curve is upward
sloping.
Production Capacity of the Economy
•
•
•
•
•
•
•
Costs of Production
Technology
Education and Training
Incentives
Taxes
Capital Stock
Worker Productivity
Short-Run Aggregate
Supply Curve
Short-Run Aggregate Supply
Curve:
• “Sticky” Wages: Some economists believe
that wages are sticky or inflexible. Wages
may also become sticky because of certain
social conventions or perceived notion of
fairness. (Nominal Wages – Past Contracts)
• Most individuals are willing to work, and
current workers are willing to work more, at
higher than at lower real wages.
Short-Run Aggregate Supply
Curve Cont.:
• Prices are also sometimes “sticky”: some prices
adjust quickly in an economy, others do not.
• Some prices are sticky because there are costs to
changing prices, called Menu Costs.
• If some prices are sticky, a decline in the price
level is linked with a decrease in output, which is
illustrative of an upward-sloping SRAS curve.
Short-Run Aggregate Supply
Curve and the Producer:
• Producer Misperceptions: Economists generally
agree that producers will produce more output as
their relative price of their good rises and produce
less output as the relative price of their good falls.
• If producers misperceive relative price changes,
then a higher price level will bring about an
increase in output, which is illustrative of an
upward-sloping SRAS curve.
Shifts in the Aggregate Supply
Curve
• Wage Rate: a rise
in equilibrium
wage rates leads
to a leftward shift
in the aggregate
supply curve.
• Price of Nonlabor
units: An increase
in the amount
nonlabor input
shifts the ASC
leftward. (PPI)
• A decrease in the
amount nonlabor
input shifts the
ASC rightward.
Shifts in the Aggregate Supply
Curve
• Supply Shocks: Major
natural or institutional
changes on the supply side
of the economy that affect
aggregate supply are
referred to as supply
shocks.
• A Supply shock might
include a drought in the
Midwest, or finding even
more oil in the middle
east.
How Short-Run Equilibrium In
The Economy Is Achieved
• Aggregate demand and short-run aggregate supply
determine the price level, Real GDP, and the
unemployment rate in the short run.
• In instances of both surplus and shortage,
economic forces are moving the economy toward
the short-run equilibrium point, where the quantity
demanded of Real GDP is equal to the short-run
quantity supplied of Real GDP.
• An increase in the short-run aggregate supply
lowers the equilibrium price level and raises Real
GDP.
The Unemployment Rate In The
Short Run
• All other things held constant, we expect a higher
Real GDP level to be associated with a lower
unemployment rate and a lower Real GDP level to
be associated with a higher unemployment rate.
• Since more workers are needed to produce more
output (more Real GDP), fewer people remain
unemployed and the unemployment rate drops.
• Since fewer workers are needed to produce less
output, more people are unemployed and the
employment rate rises.
Q & A: Identify what will happen to
the price level and Real GDP when
each of the following occurs:
• Short-Run Aggregate
Supply rises
• Short-Run Aggregate
Supply falls
• Aggregate Demand
rises
• Aggregate Demand
falls
• Aggregate Demand
rises by more than the
Short-Run Aggregate
Supply rises
• Aggregate Demand
falls by less than the
Short-Run Aggregate
Supply falls
Long Run Aggregate Supply
• Short-Run equilibrium identifies the Real GDP the
economy produces when any of these conditions
are held: sticky wages, sticky prices, producers’
misperceptions, workers’ misperceptions.
• Wages and prices eventually become unstuck and
misperceptions will turn to accurate perceptions:
when this happens the economy is said to be in
The Long Run. (All prices are flexible.)
• The LRAS curve is graphed as a vertical line
because price has no impact on output.
Long Run Aggregate Supply Shifts
• The position of the LRAS curve shows the
potential output of an economy. (A shift right
increases potential output and a shift left decreases
potential output.
• What could cause a shift:
*A change in the quantity of resources.
*A change in the quality of resources.
(A more well educated work force.)
*A change in technology.
Equilibrium in Aggregate
Demand and Aggregate Supply
*Show and explain short
run aggregate supply and
demand equilibrium.
(Demand Shock / Supply Shock)
*Show and explain SRAS
/ LRAS / and AD all in
equilibrium.
(Long-Run Macroeconomic Equilibrium)