12 McGrawHillIrwin Copyright 2012 by The McGrawHill Companies Inc All rights reserved Aggregate Demand Real GDP desired at each price level Inverse relationship Real balances effect ID: 462400
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Slide1
Aggregate Demand and Aggregate Supply
12
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Slide2
Aggregate Demand
Real GDP desired at each price levelInverse relationship
Real balances effectInterest effect
Foreign purchases effect
LO1
12-
2Slide3
Aggregate Demand
Real domestic output, GDP
Price level
AD
LO1
0
12-
3Slide4
Changes in Aggregate Demand
Determinants of aggregate demandShift factors affecting C, I, G, X
n2 components involvedChange in one of the determinants
Multiplier effect
LO1
12-
4Slide5
Changes in Aggregate Demand
Real domestic output, GDP
Price level
AD
1
AD
3
AD
2
LO1
0
12-
5Slide6
Consumer Spending
Consumer wealthHousehold borrowing
Consumer expectationsPersonal taxes
LO1
12-
6Slide7
Investment Spending
Real interest ratesExpected returns
Expectations about future business conditionsTechnology
Degree of excess capacityBusiness taxes
LO1
12-
7Slide8
Government Spending
Government spending increasesAggregate demand increases (as long as interest rates and tax rates do not change)
More transportation projectsGovernment spending decreases
Aggregate demand decreasesLess military spending
LO1
12-
8Slide9
Net Export Spending
National income abroadExchange rates
Dollar depreciationDollar appreciation
LO1
12-
9Slide10
Aggregate Supply
Total real output produced at each price levelRelationship depends on time horizon
Immediate short runShort run
Long run
LO2
12-
10Slide11
AS: Immediate Short Run
Real domestic output, GDP
Price level
AS
ISR
Q
f
Immediate-short-run
aggregate supply
P
1
0
LO2
12-
11Slide12
Aggregate Supply: Short Run
Real domestic output, GDP
Price level
0
Q
f
AS
Aggregate supply
(short run)
LO2
12-
12Slide13
Aggregate Supply: Long Run
Real domestic output, GDP
Price level
AS
LR
Q
f
0
Long-run
aggregate
supply
LO2
12-
13Slide14
Changes in Aggregate Supply
Determinants of aggregate supplyShift factors
Collectively position the AS curveChanges raise or lower per-unit production costs
LO2
12-
14Slide15
Changes in Aggregate Supply
Real domestic output, GDP
Price level
AS
1
AS
3
AS
2
0
LO2
12-
15Slide16
Input Prices
Domestic resource pricesLabor
CapitalLand
Prices of imported resourcesImported oilExchange rates
LO2
12-
16Slide17
Productivity
Real output per unit of inputIncreases in productivity reduce costs
Decreases in productivity increase costs
LO2
Per-unit production cost
=
total input cost
total output
Productivity
=
total output
total inputs
12-
17Slide18
Legal-Institutional Environment
Legal changes alter per-unit costs of outputTaxes and subsidies
Extent of government regulation
LO2
12-
18Slide19
Equilibrium
Real domestic output, GDP
(billions of dollars)
Price level (index numbers)
100
92
502
510
514
a
b
AD
AS
Real Output
Demanded
(Billions)
Price
Level
(Index Number)
Real
Output
Supplied
(Billions)
$506
108
$513
508
104
512
510
100
510
512
96
507
514
92
502
0
LO3
12-
19Slide20
AD Increases: Demand-Pull Inflation
Real domestic output, GDP
Price level
AD
1
AS
P
1
P
2
Q
2
Q
1
Q
f
AD
2
0
LO4
12-
20Slide21
Decreases in AD: Recession
Real domestic output, GDP
Price level
AD
1
AS
P
1
P
2
Q
1
Q
2
Q
f
AD
2
c
a
b
0
LO4
12-
21Slide22
Decreases in AD: Recession
Prices are downwardly inflexibleFear of price wars
Menu costsWage contracts
Efficiency wagesMinimum wage law
LO4
12-
22Slide23
Decreases in AS: Cost-Push Inflation
Real domestic output, GDP
Price level
AD
AS
1
P
1
P
2
Q
1
Q
f
AS
2
a
b
0
LO4
12-
23Slide24
Increases in AS: Full-Employment
Real domestic output, GDP
Price level
AD
1
AS
2
P
1
P
2
Q
2
Q
1
AS
1
b
AD
2
c
P
3
Q
3
a
0
LO4
12-
24Slide25
Impact of Oil Prices Diminished?
1970’sReduced AS and negative GDP gap
Cost-push inflationRising unemployment
2000’sCore inflation steadyUse 50% less oil and gas todayFederal Reserve more vigilant
12-
25Slide26
Stagflation
is a combination of recession (falling real GDP)
and inflation. Now we will show how stagflation could be produced by a supply shock
StagflationSlide27
www.bls.govSlide28
Price per barrel of 320 crude oil
Source:
Petroleum Economist
Anchovies
Grain failuresSlide29
Stagflation due to oil price shock
10.0
9.75
AS
0
AD
AS
1
110
115
Real GDP
0
Price Level
Story of Joseph
Buffer Stock program