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# AP Macroeconomics - PowerPoint PPT Presentation

AP Macroeconomics. The AS/AD Model. The AS/AD Model. The equilibrium of AS & AD determines current output (GDP R ) and the price level (PL ) If equilibrium of AS & AD is ON LRAS: Unemployment is 3-4% Output is where it “should” be Also at a point ON the PPC. Full Employment.

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### AP Macroeconomics

The AS/AD Model

• The equilibrium of AS & AD determines current output (GDPR) and the price level (PL)

• If equilibrium of AS & AD is ON LRAS:

• Unemployment is 3-4%

• Output is where it “should” be

• Also at a point ON the PPC

• Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point.

LRAS

SRAS

PL

P

AD

YF

GDPR

• A recessionary gap exists when equilibrium occurs below full employment output.

SRAS

LRAS

PL

P

AD

Y

YF

GDPR

• An inflationary gap exists when equilibrium occurs beyond full employment output.

LRAS

SRAS

PL

P

AD

YF

Y

GDPR

Changes (Δ)in AD

• Δ Consumption (C)

• C↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

• C↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

• Δ Gross Private Investment (IG)

• IG↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

• IG↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

Changes (Δ)in AD (cont)

• Δ Government Spending (G)

• G↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

• G↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

• Δ Net Exports (XN)

• XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

• XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

SRAS

LRAS

PL

P1

P

AD1

AD

Y

YF

GDPR

C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

LRAS

PL

SRAS

P

P1

AD

AD1

YF

Y

GDPR

C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

Changes (Δ)in SRAS

• Δ Input Prices

• Input Prices↓ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

• Input Prices↑ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑

• Δ Productivity

• Productivity↑ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

• Productivity↓ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑

Changes (Δ)in SRAS (cont)

• Δ Legal-Institutional Environment

• Deregulation .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

• Regulation .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑

SRAS

LRAS

PL

SRAS1

P

P1

AD

Y

YF

GDPR

Input Prices↓, Productivity↑, and/or Deregulation

.: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

SRAS1

LRAS

PL

SRAS

P1

P

AD

Y1

YF

GDPR

Input Prices↑, Productivity↓, and/or Regulation/Business Taxes ↑

.: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑

• ΔC, ΔIG, ΔG, and/or ΔXN = Δ AD

• AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

• AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

• Δ Input Prices, Δ Productivity,

and/or Δ Regulation = Δ SRAS

• SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

• SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑

• Assume the US economy is in a state of full employment. (Multiplier)

• Draw a correctly labeled AS/AD graph showing representing that fact.

• Now suppose that private investment decreases. Show the effect of that decrease on your AS/AD graph.

• Explain the impact of the decrease in private investment.

Long-Run Aggregate Supply (LRAS) (Multiplier)

• scenario to illustrate the point that we will always (hopefully) come back to LRAS and why/how LRAS is independent of price level

• To produce more than full employment output overtime is necessary.

• Input costs (labor) will go up

• When input costs are free to change, the high demand for them will start to raise input costs and lead to cost push inflation

Long-Run Aggregate Supply (LRAS) (Multiplier)

• As input prices increase firms profits will fall until rise in input prices match the change in output prices.

• Firm profits return to original levels and firms will be motivated to produce at FE output level