Aggregate Supply and Demand Part A: Overview of Aggregate Demand & Aggregate Supply All purchases = aggregate demand (AD = C + I + G + NX ) All production = aggregate supply (AS) GDP measures? Question: GDP measures how many of the following? Production, spending, income Recall from section 1 ● Question: let’s look at one economic transaction -- you buy $10 of fresh corn from a farmer at a roadside stand. Consider the value of the produced corn, the income the farmer receives, and the dollars you spent. How many of these are equal to each other in value? Scaled up to the entire economy, we can measure GDP by production, income, or spending and get the same value Symbols and behavior GDP measures production, spending and income (Sec. 1) ● Symbol: Y “Price level” -- average prices in the entire economy ● measure w/GDP deflator (Sec 1) ● CPI moves similarly ● Symbol: P Question: How many of the following could not be seen or measured by P or Y? ● expansions, inflation, unemployment, deflation, recessions, federal funds rate, disinflation ○ expansions, recessions ○ ○ Question: What’s this stuff all about? ● Answer: How monetary and fiscal policy (and other things) change AD and SRAS and then change P and Y. That is, what causes expansions, recessions, slow growth (now) ____ Part B: Aggregate Demand u = unemployment rate Y = real gdp P = price level (w/GDP deflator) Question: When total spending in the economy grows*, more workers have jobs. What causes total spending to rise?
● * Keep Okun’s Law in mind def: Aggregate demand (AD) All spending in an economy for different values of the price level (P). Components... ● C - consumption ○ (67% of GDP) ○ def: household disposable income; income - taxes + transfer payments ○ as disposable income increases, C increases ○ wealth effect: as wealth increases, C increases ■ ex: ‘08: household wealth decreases 18% ($11 tril) ○ as interest rates decrease, C increases ■ ex: why Fed funds rate is ~0% ● population: more people → C increases ● Question: If both transfer payments and interest rates increase, C would… ○ A. increase B. might increase or decrease C. decrease ● I - investment ○ 15% of GDP ○ Question: We earlier described how interest rates and taxes affected households (as part of consumption). Do you think that increases in them would affect I in the same way (i.e. I rise or fall?) ■ Thus, as interest rates decrease, I increases, and as taxes on investment decrease, I increases, and more firms, I increases ● G - government purchases ○ 19% of GDP ○ independent of taxes (T) ○ broader concept ■ federal expenditures = G + transfers + interest payments (on the federal debt) ● NX - net exports (exports - imports) ○ -3% of GDP ○ exports - imports ○ ex: U.S. exports = $2.1 trillion (14%) imports = $2.7 trillion (17%) ○ if foreign income rises, NX ↑ ○ the dollar’s value vs foreign currencies (NOT P) ■ ex: 11/6/2013 $1.35 bought €1 11/6/2015 $1.07 bought €1 ○ Question: From 2013 to 2015 the US $__ value compared to the euro and it was ___ for Air France to buy a U.S. made Boeing jet ■ A. lost, easier B. lost, harder C. gained, easier D. gained, harder
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