Transcript Aggregate demand - McGraw Hill Higher Education

Chapter 19
Delving Deeper Into
Macroeconomics
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
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Aggregate demand and supply
Long-term equilibrium
Shifts in aggregate supply
Shifts in aggregate demand
Basics of saving and investment
Trade deficit
19-2
Aggregate Demand
• Aggregate demand is the sum of the quantity
demanded from the different sectors of the
economy: personal consumption (C),
nonresidential investment (NR), residential
investment (R), government consumption and
investment (G), inventory investment (I), and net
exports (NX).
• The equation for aggregate demand (AD) is:
AD=C+NR+R+G+I+NX.
19-3
Aggregate Demand Curve
• The aggregate demand curve links the
average price level of the whole economy
with aggregate quantity demanded.
• The aggregate demand curve is
downward-sloping.
– Thus, a decline in the overall price level leads
to an increase in the quantity demanded by
consumers, businesses, and government.
19-4
Aggregate Demand Curve
• Lower aggregate prices leads to more
aggregate demand, for the following
reasons:
– First is the wealth effect.
• Lower prices lead to an increase in the value of
your assets. This higher wealth leads to more
spending.
– Second is the interest rate effect.
• Lower prices lead to lower interest rates, which
increases consumption.
19-5
Aggregate Demand Curve
– Third is the exchange rate effect.
• As interest rates fall, it become less appealing for
foreigners to invest in the US.
• The demand for dollars falls, and the dollar
depreciates relative to other currencies.
• This increases net exports and GDP.
19-6
Aggregate Demand Curve
19-7
Aggregate Supply
• Aggregate supply is the quantity of goods and
services that the economy produces.
• The aggregate supply curve links the average
price level of the economy with the quantity of
goods and services produced.
• The short-run aggregate supply curve is upwardsloping.
• But, in the long term, aggregate supply is
vertical, because when prices rise, so do wages
and all the other costs of production.
19-8
Long-Term and Short-Term Aggregate
Supply
Long-term aggregate
supply curve
Price
level
Short-term aggregate
supply curve
P1
P
Q
Q1
GDP
19-9
Long-term Equilibrium
• The long-term aggregate equilibrium
occurs at the point where long-run
aggregate supply is equal to aggregate
demand and the two lines cross.
• This point gives us an equilibrium
aggregate price level, P, for the economy,
and an equilibrium output, Q.
• Long-term aggregate supply is the same
as potential GDP.
19-10
Aggregate Demand and Supply
19-11
Shifts in Aggregate Supply
• A reduction in aggregate supply (curve
shifts to the left) causes equilibrium output
to fall and the price level to rise.
– Thus, inflation rises and growth slows.
• An increase in aggregate supply (curve
shifts to the right) causes equilibrium
output to increase and the price level to
fall.
– Thus, inflation is reduced and growth rises.
19-12
Shift in Aggregate Supply
Aggregate supply
after terrorist attack
Price
level
Original aggregate
supply curve
P1
P
Aggregate demand
curve
Q1
Q
GDP
19-13
Shifts in Aggregate Demand
• An increase in aggregate demand (curve
shifts to the right) causes both the
equilibrium level of output and the price
level to rise.
– Thus, both inflation and growth increase.
– But this is only temporary.
• A decrease in aggregate demand (curve
shifts down to left) causes both equilibrium
output and the price level to fall.
– Thus, both inflation and growth slow.
19-14
Shifts in Aggregate Demand
• Shifts in demand lead to only temporary
changes in quantity.
• As prices and wages adjust, the economy
moves along the long-term supply curve,
with prices higher but output moving back
to the starting point.
• Attempts by policymakers to stimulate the
economy and boost output above its longterm equilibrium level may succeed
temporarily.
19-15
Shifts in Aggregate Demand
• In the long run, however, the only outcome
of government stimulation is to increase
inflation.
• In other words, there is no sustainable way
to drive unemployment down below its
natural rate.
19-16
Shift in Aggregate Demand
Long-term aggregate
supply curve
Price
level
Short-term aggregate
supply curve
C
P2
P1
B
P
A
New aggregate
demand curve
Original aggregate
demand curve
GDP
Q
Q2
Q1
19-17
Saving and Investment
• Saving is the portion of income that is not
consumed.
• It is available to invest in long-term assets.
• There are three types of savings:
– Personal savings are what remains from
household income after taxes and
consumption spending are taken out.
– Government savings are the excess of tax
revenue over current spending – that is, the
amount of money the government
accumulates.
19-18
Saving and Investment
– Business savings are the part of corporate
profits that are not distributed in the form of
stock dividends or some other payment to
owners.
• National savings is the sum of personal
savings, government savings, and
business savings.
• Another source of potential funding of
investment is flows of money from outside
the US.
19-19
Sources and Uses of Savings
19-20
What Determines Savings?
• The personal savings rate in the United States
has been falling. It was over 10% in the early
1980s, and now it is reportedly close to zero.
– The personal savings rate is equal to personal
savings as a percentage of disposable personal
income.
• The personal savings rate in the US is much
lower than in many other countries. This is also
true of the national saving rate.
19-21
The US Personal Savings Rate
19-22
Does Saving Matter?
• In a closed economy (no global connections),
savings are important, because they
determine investment in the long run.
• But in a global economy, investments can be
funded with overseas monies.
• The country is effectively borrowing the
money from overseas.
• The question is whether this can be
sustained.
19-23
Savings versus Investment
19-24
Trade Deficit
• The trade balance is the difference
between exports of goods and services
and imports of goods and services.
• If the trade balance is negative – that is, if
imports exceed exports – we say that the
country is running a trade deficit.
• The US trade deficit has increased
significantly in recent years.
19-25
Goods and Services Trade Balance
as Percent of GDP
19-26
Explanation for the Trade Deficit
• There are a number of possible
explanations for the trade deficit:
– First, it is our fault because:
• US manufacturers are unable to compete.
• US consumers are overspending, causing the
deficit.
• Overspending by the federal government is the
cause.
19-27
Explanation for the Trade Deficit
– Second, it is their fault because:
• Foreign countries put up barriers that keep out US
exports and subsidize their own exports.
– Finally, it is no one’s fault because:
• The strength of the US economy allows us to
import more goods.
• Other countries want to lend to the US.
19-28
Paying for Trade
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The US can pay for what we import in
four ways:
– Sell exports to foreigners.
– Borrow money from foreign investors.
– Sell assets such as stocks, bonds, and real
estate to foreign investors.
– Allow foreign companies to build factories in
the US.
19-29