Lecture19--AD-AS

Lecture19--AD-AS - Aggregate Demand-Aggregate Supply...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Aggregate Demand-Aggregate Supply Analysis The Concept of Macroeconomic Equilibrium and the Causes of Recessions and Inflation Macroeconomic Equilibrium Price Level (Index Number) s Macroeconomic equilibrium occurs for an economy when aggregate quantity demanded equals 120 aggregate quantity supplied AS E AD 12 Real GDP Trillions of $ Macroeconomic Equilibrium Price Level (Index Number) s s When aggregate quantity demanded falls short of aggregate quantity supplied there 130 will be unanticipated buildup of inventories 120 As orders for new products and hiring decline, the price level and real GDP will fall AS E AD 10 12 13 Real GDP Trillions of $ Macroeconomic Equilibrium Price Level (Index Number) s s When aggregate quantity demanded exceeds aggregate quantity supplied there will be unanticipated 120 depletion of 110 inventories As orders and hiring increases real GDP and the price level rise AS E AD 10 12 13 Real GDP Trillions of $ An economy in equilibrium at full employment: Price Level (Index Number) Aggregate Supply 120 E1 Initial Aggregate demand 0 12 Potential real GDP Real GDP (Trillions of Base Year Dollars) Equilibrium real GDP = Potential real GDP A Decrease in Aggregate Demand Price Level (Index Number) Aggregate Supply 120 110 E 2 E1 0 Initial New Aggregate demand Aggregate demand 10 12 Real GDP (Trillions of Base Year Dollars) Potential real GDP A decrease in aggregate demand causes equilibrium real GDP to decline and puts downward pressures on the price level An increase in Aggregate Demand: Price Level (Index Number) Aggregate Supply 130 E2 120 E1 New Aggregate demand Initial Aggregate demand 0 14 12 Potential real GDP Real GDP (Trillions of Base Year Dollars) As aggregate demand increases both the equilibrium price level and real GDP increase. Changes in aggregate demand can be caused by: A change in consumer demand (C) s A Change in investment demand (I) s A Change in government purchases (G) s A change in net export demand (NE) s Remember GDP = C+I+G+NE s Impact of a decrease in aggregate supply on macroeconomic equilibrium: Price Level (Index Number) New Aggregate supply Initial Aggregate Supply E2 130 120 E1 Initial Aggregate demand 0 11 12 Potential real GDP Real GDP (Trillions of Base Year Dollars) Equilibrium real GDP declines but the equilibrium price level rises Changes in aggregate supply can be caused by: Changes in the availability of inputs s Changes in prices of raw materials, fuel, and other other material inputs s Changes in nominal wages s Changes in the quality of inputs s The Aggregate Supply Curve s s Input prices and technology are fixed along an aggregate supply curve Unit costs rise slowly at first then rapidly as full employment and the economy's capacity is approached and prices must rise to cover those costs. Price Level (Index Number) Segment 1 Excessive Unemployment Segment 2 Approaching Full Employment Segment 3 Overheated Economy AS Potential Real GDP Real GDP ...
View Full Document

This note was uploaded on 02/08/2010 for the course EC 205 taught by Professor Hyman during the Spring '08 term at N.C. Central.

Ask a homework question - tutors are online