1 / 17

Chapter 11: Aggregate Demand & Aggregate Supply

Chapter 11: Aggregate Demand & Aggregate Supply. Aggregate Demand (AD) – Aggregate Supply (AS) model is a variable price model. AD – AS model provides insights on inflation, unemployment, and economic growth. Aggregate Demand.

min
Download Presentation

Chapter 11: Aggregate Demand & Aggregate Supply

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 11: Aggregate Demand & Aggregate Supply • Aggregate Demand (AD) – Aggregate Supply (AS) model is a variable price model. • AD – AS model provides insights on inflation, unemployment, and economic growth

  2. Aggregate Demand • A schedule that shows the various amounts of real domestic output that domestic & foreign buyers will desire to purchase at each possible price level • Shows an inverse relationship between price level and domestic output

  3. Price v. Real GDP: Reasons for Inverse Relationship • Real Balances Effect: When Price falls, purchasing power of existing financial balances rises  increase spending • Interest Rate Effect: A decline in Price means lower interest rates  increase levels of certain types of spending • Foreign Purchases Effect: When Price falls, US prices will fall relative to foreign pries  increase spending on US exports, decrease import spending in favor of US products that compete w/ imports

  4. Determinants of Aggregate Demand Real GDP = C + Ig + G + Xn • Changes in Consumer Spending • Changes in Investment Spending • Changes in Governments Spending • Changes in Net Exports

  5. Changes in Consumer Spending • Consumer Wealth • Consumer Expectations • Consumer Indebtedness • Taxes

  6. Changes in Investment Spending • Interest Rates • Profit Expectations • Business Taxes • Technology • Amount of Excess Capacity

  7. Change in Government Spending • This is Fiscal Policy (Chapter 12)

  8. Changes in Net Exports When unrelated to price level: • Income Abroad • Exchange Rates • Depreciation of $ encourages US exports since US products become less expensive for foreign buyers, who can now obtain $ for their currency • Depreciation of $ discourages import buying in the US since it is more expensive for Americans to exchange foreign currency

  9. Aggregate Supply • A schedule showing level of Real GDP available at each Price • Higher Prices create an incentive for firms to produce & sell more • Lower Prices prompt firms to reduce output • Direct/Positive relationship between P & Real GDP

  10. Determinants of Aggregate Supply • Change in Input Prices • Change in Productivity • Change in Legal-Institutional Environment

  11. Change in Input Prices • Availability of Resources • Land, Labor, Capital, & Entrepreneurial Ability • Prices of Imported Resources • Market Power in Certain Industries

  12. Change in Productivity • Productivity = Real Output / Input • Changes in Per-unit Production Cost = Total Input Cost / Units of Output • If productivity rises, unit production costs fall  Shifts AS to right, lowers Prices • If productivity falls, unit production costs rise  Shifts AS to left, increasing Prices

  13. Legal – Institutional Environment • Business Taxes • Subsidies • Government Regulation

  14. Equilibrium: Price v. Real Output • Equilibrium Price and Quantity are found where AD and AS curves intersect

  15. Decreases in AD • If AD decreases, recession and cyclical unemployment may result • Wage contracts are not flexible, business can’t afford to reduce prices • Employers are reluctant to cut wages b/c impact on EE effort • Minimum Wage Laws keep wages up • Menu Costs are difficult to change • Fear of price wars keeps prices from being reduced

  16. Why is Unemployment in Europe So High? • High minimum wages • Generous welfare benefits for unemployed • Restrictions against firings discourage employment • 30 – 40 days of paid vacation & holidays increase costs of hiring • High worker absenteeism reduces productivity • Higher employer cost of fringe benefits discourages hiring

  17. Chapter 11 Study Questions • 7, 8: Determinants of AD & AS

More Related