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Chapter 22 - Aggregate 9 ans To The relationship between...

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Unformatted text preview: 9/30/2010 Aggregate 9 ans! : To . The relationship between the quantity of aggregate output demanded and the _ price level when all other variables are ‘ held constant. . Aggregate demand is made up of four component parts {Ci/Lulfi-J \ fxma aégov” n giggly] pig cog/km“?! ,,. is.“ 9/30/2010 Aggregate Demand (cont’d) w:— CG?” CO: 31‘ \Q'fi' 23.“ ’3'» 5225'? 9'" '_ . f 232 5:} 2,2" / r 1.2"; 25 " H ‘2 \ ,. 2'9"? '2’” .'L ’2 '2'" is ' ‘ “’ " ' '\\2 ,2. e 222:. 2.222;; -. - Y”"=C+I+G+NX The aggregate demand curve is downward sloping because P~L:>M/PT:>1'~L:>I T2172" T and P$:>M/PT:>1‘¢:>EL:>NXT:>YM T . n . '2"! If 2 j ""2 _ FIGURE 1 Shifts in the Aggregate Demand Curve Aggregate Price Levef, P 2 Aggregate Output, Y 9/30/2010 Aggregate Demand (cont’d) . The fact that the aggregate demand curve is downward sloping can also be derived from the quantity theory of money analysis. - If velocity stays constant, a constant money supply implies constant nominal aggregate spending, and a decrease in the price level is matched with an increase in aggregate demand. Factors that Shift Aggregate Demand 59mm? ii?” = ~ - quv w r as Tia/vi (:UWi i’l'ii‘i' it“ a An increase in the money supply W f\ => W 3 {w 0‘ shifts AD to the right: holding velocity Pm wt constant, an increase in the money supply ? increases the quantity of aggregate demand at each price level /ii An increase in spending from any of?“ the components CFLmQ, NX, will also shift AD to the rightl A CE ,9}th s; A xi”) .— ‘fiflc Y5: ‘TY‘EOLW .:— Q Vii.) '< 33%,- , 5 a mag - 'TJEMEJQ $4] QV Macy 4r ~T""OJ l. “a; 3’ Mail‘s CLIVE“: 1 \ t" f L: nk\\}nk’\i S‘DiY‘KTEE \)\’\€Qc “(Ca {flit} w , (Malm’ bug”; i135» it??? Va :3“ . .1 .1, _ . 9% 4‘3. or \prl/ji: 0r fi‘CpiJ}. er “€in 2“. 9/30/2010 Summary Table 1 Factors That Shift the Aggregate Demand Curve vttti tat Wit, Aggregate Supply 0 Law aggregate supply curve if — Determined by amount of capital and labor and X ‘I/ the available technology 6 Y: xi}?! <_ \ — Vertical at the natural rate of output generated by the natural rate of umploymen ~— tent»: “a? . Name \r” m a. ’(Q‘f’ ' 1‘1?" “ :2 _-§-;: s . Short— run aggregate supply curve — Wages and prices are sticky Wax ~— Generates an upward sloping SRAS as firms attempt to take advantage of short- run profitability when price level rises FIGURE 2 Long-«Run Aggregate Supply Curve Aggregate 1%?143 Price Levei, P Yn P Aggregate Output Y . 3‘: {W1 meta} mi r *H‘s:‘3fi:s.‘1“=“1: . w e'la'JN «in; *3.- 5 FIGURE 3 Aggregate Supply Curve in the Short Run Aggregate Price Levei, P Aggregate Output, Y 9/30/2010 9/30/2010 0 Costs of production — Tightness of the labor market — Expected price level — Wage push — Change in production costs unrelated to wages (supply shocks) Summary Table 2 Factors That Shift the Short—Run Aggregate Supply Curve 9/30/2010 FIGURE 4 Equilibrium in the Short Run Aggregate Price Level, P Aggregate Output. ‘5’ FIGURE 5 Adjustment to Long-Run Equilibrium in Aggregate Supply and Demand Analysis Y, r; r, Agg-agalw Ouipul. Y [a] WWW-run equfllbdwn in which Yb Y: Awash : ’3’” Papa Laval: F' - Mam-gala 0mm. Y Eb] with! mmn equWum in chfl Y g Y“ 1;” Jim“ l/‘z‘ a W, :gggig WM Self-Correcting Mechanism a Regardless of where output is initially, it returns eventually to the natural rate 0 Slow L145 flog/“9229:; — Wages are inflexible, particularly downward — Need for active government policy L20 229th; \l 7 ‘01} . x. . Rapld tuft-Hf {1 .4” f: {‘(LVJ _ Wages and prices are flexible — Less need for government intervention 22‘. 7- r ”mp“- w 9:2: 3.27” 2.62.25 55-9 5 . c»: 5* Pu: . -- 3 FIGURE 6 Response of Output and the Price Level to a Shift in the Aggregate Demand Curve Aggregate Price Levei, P 9/30/2010 2;: 9/30/2010 FIGURE 7 ReSponse of Output and the Price Level to a Shift in Short-Run Aggregate Supply {3}:ng grace .4 s......._s.‘..wt_..,.u_‘..2,.._ MW- Aggregate £5343 Price Levei, P 2: \E \g 2 “f in "s: A t m :> ii“ 522%“133 P2 ———————————_ a» K ”we”! ; V“ i is” 1 3?. €94.32: ’ P»; ——————————— 4——— i l Y2 Shifts in Long—Run Aggregate Supply . Economic growth o Real business cycle theory — Real supply shocks drive short-run fluctuations in the natural rate of output (shifts of LRAS) — No need for government intervention . Hysteresis — Departure from full employment levels as a result of past high unemployment — Natural rate of unemployment shifts upward and natural rate of output falls below full employment — Expansionary policy needed to shift aggregate demand Conclusions . Shift in aggregate demand affects output only in the short run and has no effect in the iong run . Shifts in aggregate demand affects oniy price level in the long run - Shift in short run aggregate supply affects output and price only in the short run and has no effect in the long run (holding the aggregate demand constant) - The economy has a self—correcting mechanism ”5*“ gobgnmses Grit-1:5 3 s ‘* a L {fame WM , \ l _ a yam \{S‘i‘ Yr! ”4“ ‘- i :> “icy!“ ‘J‘AQ—‘%‘=’:\'p1gl\u\‘A‘K‘GWLF;Ili‘ ‘. w; " ’ ‘ Table 3 Unemployment and Inflation During the Vietnam War Buildup, 1964—1970 9/30/2010 10 9/30/2010 Table 4 Unemployment and Inflation During the Negative Supply Shocks Periods, 1973—1975 and 1978—1980 Table 5 Unemployment and Inflation During the Favorable Supply Shocks Period, 1995—1999 11 Table 6 Unemployment and Inflation During the Negative Demand Shocks Period, 2000—2004 Table 7 Unemployment and Inflation During the Perfect Storm of 2007—2008 9/30/2010 12 wax: “Vt-1:" {1x "—=3___ Ly“ ’?\1~,f"‘,1.. as» ”M- 1 “E"- 3’; CA” I?" L: \_ x a," > A i ...
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