Transcript Podaż globalna, poziom cen i tempo dostosowań - E-SGH

Aggregate demand and
aggregate supply.
Lecture 6
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Two macroeconomic models
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1. Keynesian model: sticky prices and unemployed factors of
production. Increase in demand (fiscal and monetary policy)
increases output and income.
2. Classical model: wages and prices flexible. Equilibrium means full
employment of factors of production. Fiscal and monetary policy
has an impact on prices. No impact on level of production.
Short run: not enough time to adjust wages and prices to the
change in demand. Keynesian approach more close to reality
Long run: adjustment of wages and prices takes place. Classical
model more useful
Transition of the economy from the short run to the long run
crucial in macroeconomic analysis
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Two parts of analysis:
aggregate demand and aggregate supply
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Aggregate demand depends on the
relation between goods market and
money market
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Aggregate supply depends on thre
relation between goods market and labor
market
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The aggregate demand curve (standard
framework)
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The relation between prices, real money supply,
interest rate, investment and aggregate demand
M is given, then:
if P↓, M/P↑, r↓, I↑, Y↑ or
If P↑, M/P↓, r↑, I↓, Y↓
AD curve shows different sets of the price
level P and real income Y at the interest
rate which guarantees equilibrium at money
market
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The aggregate demand curve
(targeting inflation approach) 1
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growing instability of money demand→ CB
stopped to control supply of money
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Majority of CB is targeting inflation rate
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targeting inflation policy: CB is changing the
interest rate to keep inflation rate close to
the target inflation rate
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The aggregate demand curve
(targeting inflation approach) 2
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It means that inflation rate is not controlled directly
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CB makes the forecast of the inflation rate and sets nominal interest rate
(r) at the level which makes the real interest rate (i) close to required
level
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i=r-π, where π- the inflation rate
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The increase in nominal interest rate has to be higher than the
increase in inflation rate
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If current inflation rate higher than π C B increases nominal interest
rate to achieve higher real interest rate.
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Higher i diminishes aggregate demand → prices go down (lower
inflation)
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Aggregate demand curve shows that increase in inflation rate results
in lower output. Lower output caused by the increase in interest rate
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Shift of AD curve
Shift of AD curve caused by the change in
any of aggregate demand parts: C, I, G
 Increase in G for example shifting the IS
curve to the right – new level of Y, but
price level does not change
 AD curve shifts parallel to the right
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Rotation of the AD curve
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Change in price level shifting LM curve (new level of
M/P)
The slope of IS curve depends on the sensitivity of
investment to the changes of the interest rate: more
flatter IS curve means „I” more sensitive to the change
in „r”
The change in „r” caused by change in M/P makes „I”
and „Y” higher than in case of more steeper IS curve
AD curve rotates
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Pigou effect
Pigou effect: change in consumption of
households due to change in M/P
 Lower prices: households may buy more
goods with the same amount of money, C
goes up
 Change in M/P shifts LM curve and change
in C shifts IS curve
 AD curve rotates
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Aggregate supply curve
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AS shows the amount of output firms want to supply at each price level. It
summarizes the interactions of the goods and factor markets.
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P = aW(1 + m), P- price level, a-labor requirement per unit of output, m – capital
cost assumed to be a relative markup over labor costs (constant), W- money wages
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Prices going up, other things equal, because of the cost of labor: the money wage W;
a- labor requirement,
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The price at which firms are willing to sell is likely to increase as output rises
because:
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Higher output – more labor needed, higher labor demand increases the wages and
the price level
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The slope of AS curve depends on that how responsible wages are to an expansion
in output and employment, it can be vertical (fully flexible wages), horizontal (sticky
wages) or positively slopped (wages partially flexible)
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Long-run aggregate supply curve (LAS) and short-run aggregate supply curve (SAS)
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Determinants of long-run aggregate
supply
Shifts in LAS reflect the growth in the
potential level of output
 Sources of this growth include:
 - increases in capital and labor input
 - increases in productivity growth
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Supply and prices in the short-run
 short run: prices (including wages) inelastic
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Aggregate supply curve flat (horizontal in some cases)
Why wages inelastic (sticky)?
-a) minimum wage legislation,
b) unemployment benefits,
c) labor unions,
d) other labor market rigidities
Inflexible prices the reason of the difference between „Y” high
enough to reach full employment and „Y” economy produces
Full employment means unemployment rate 2%-5%
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Output and prices in long run equilibrium
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Yp – the potential, full employment output level. Changes in
wages and prices maintain a continuous full employment
AT E equilibrium on all 3 markets: goods, money and labor
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What makes prices (wages) flexible
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No institutional arrangements on the labor
market such as long term labor union
contracts
Labor market „frictionless”
Firms compete for labor (demand)
Workers compare the wage for an extra hour
of effort (income-leisure trade-off)
at the equilibrium wage everybody who wants
to work can have a job
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Monetary or fiscal policy impact on
aggregate demand (classical model)
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AD (MDS) curve shifts to the right because of the increase: a) in nominal money supply: prices↑, but real
money supply (M/P) constant→interest constant→new equilibrium E” at the same output
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or b) increase in government spending, rising the price level→real money supply (M/P)↓, the ineterest
rate↑, full crowding out of private investment, output level does not change and remains at the full
employment level Yp.
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Short run supply curve SAS
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Each SAS curve responds to the inherited rate of nominal wages
growth
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If inflation below πo (or decrease in demand resulting in fall of
prices) real wages higher than anticipated
Labor more costly, firms cut output: move to the point B along
SAS
Lower output: the growth rate of wages falls
Prices do not have to rise (lower inflation) – shift to SAS1
(lower prices and increase in demand)
If still not full employment – shift to SAS2: equilibrium
restored with lower prices (lower inflation)
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Short run supply curve
An adverse supply shock
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Oil prices rise, any given level of output supplied at
higher prices, SAS curve shifts up
The increase in price lowers real money stock (M/P),
raises the interest rate, reduces aggregate spending
New equilibrium at lower output and higher prices
Growing unemployment – pressure to lower wages
SAS curve shifts back
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Short run supply curve
Increase in potential output level (standard
approach)
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Caused by the increase in the labor supply (more
women want to work)
The long run supply curve AS shifts to the right
As long as no decrease of wages, no change in output,
prices and employment; equilibrium at initial SAS, but
unemployment higher
Pressure on decrease in wages, shift from SAS to SAS1:
lower prices higher demand and output
If unemployment still exists, further decrease in wages
and prices.
New equilibrium at SAS2: lower prices and
higher output and full employment restored
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Increase in potential output level
(targeting inflation approach)
Increase in labor supply shifts AS
 In the long run increase in AS has to cause increase in
AD
 Central bank lowers the interest rate, AD curve shifts
up
 If monetary policy easy enough, AD curve shifts to the
right compensating the shift of AS curve
 Inflation target reached at the new equilibrium level:
lower interest rate and higher level of ouput= new
potential output
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Demand shock (targeting inflation
approach)
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Fluctuations of the demand, demand curve shifts to the
right or to the left
The economy can not keep the inflation target
Fast reaction of Central Bank may compensate demand
shocks
CB may change the nominal interest rate in a way which
makes possible return to initial demand curve
Economy comes back to the former equilibrium point
Stabilization of the inflation rate and the output level
achieved
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Transitory supply shock: a choice between stability
of output and stable inflation rate
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Short run supply fluctuates, achieving higher or lower
than initial supply level (shifts of SAS curve)
Stabilization of inflation means large changes in output
Monetary policy unable to stabilize both: inflation and
output
Good solution: the interest rate at the level allowing for
certain changes in inflation to diminish changes in
output
The policy of flexible inflation target
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Classical (a) model versus Keynesian
model (b)
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Supply side and demand side
policies
Supply side economics – theoretical
justification of the policy stimulating the
aggregate supply: a reduction in payroll
taxes (taxes paid by firms on the wages
they pay their employees) or better
information on job availability)
 Demand side economics – fiscal and
monetary policy to stabilize output and
employment at close to potential level
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summary
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The Keynesian AS curve horizontal,
Shifts in aggregate demand affect only output. The slope of
the Keynesian AS curve based on the assumption that
wages do not change when the level of employment changes
The classical AS curve vertical. Classical model – wages and
prices fully flexible. The wage adjusts to maintain continuous
full employment in the labor market
Full employment in the labor market equals the full
employment level of output (potential output)
Classical approach: Shifts in AD have their effects in prices
and not in output
Keynesian approach: shifts in AD change the level of output,
sticky prices
Keynesian model useful to explain short-run adjustments in
the economy (AS curve slope between vertical and
horizontal position),
Classical model useful to describe long-run adjustments
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