Ch 10 Notes (ECON E-202; Introduction to Macroeconomics; Wenyi Shen)

Ch 10 Notes (ECON E-202; Introduction to Macroeconomics; Wenyi Shen)

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Unformatted text preview: Chapter 10 Real GDP and the Price Level in the Long Run ' Output Growth and the Long-Run Aggregate Supply Curve ' Total Expenditures and Aggregate Demand ' Shifts in the Aggregate Demand Curve ' Long-Run Equilibrium and the Price Level ' Causes of Inflation Output Growth and the Long-Run Aggregate Supply Curve Long-Run Aggregate Supply Curve (LRAS) - A mam line representing the real output of goods and services after full adjustment has occurred - It represents the real GDP of the economy under conditions of full employment; the economy is on its production possibilities curve MW .The Production Possibilities and the Economy’s Long—Run Aggregate Supply Curve Panel (a) (.0 '0 O O (5 E '5. t6 0 Consumption Goods Panel (b) LRAS E > CD _I (D .2 5i i /_l_l_.L_l_l_J_l_ 0 12 13 14 15 16 17 18 Real GDP per Year ($ trillions) 3 LRAS is vertical! - Input prices fully adjust to changes in output prices - Suppliers have no incentive to increase output - Unemployment is at the natural rate gall E’V‘l Plow-tuck, - Determined by endowments and technology (or existing resources) Output Growth and the Long—Run Aggregate Supply Curve Growth is shown by shifts of either the production possibilities curve or the LRAS curve caused by: The Long-Run Aggregate Supply Curve and Shifts in It Panel (a) c0 '0 O O (5 LG? '6. (‘6 0 Consumption Goods Panel (b) LHAS LHA82011 E > (1) __l CD .9. a: l /_l__l_;l1_l_l_L 0 11 12 13 1414.315 16 17' Real GDP per Year ($ trillions) 6 Total Expenditures and Aggregate Demand - Aggregate Demand ‘- Aggregate Demand Curve (AD) — A curve showing planned purchase rates for all final goods and services in the economy at W,“ all other things held constant Aggregate Demand Curve § 3 E E: D 8 .9 1D 11 12 13 Real GDP per Year (8 trillions) «15W UWW‘QO 00“ 14 What happens when the price level rises? ° The real—balance effect (or wealth effect) - The change in expenditures resulting from a change in the real value of money balances when the price changes, all other things held constant; also called the weaZrk eflecz‘. - The interest rate effect T . . . . _@/T ~ H1gher price levels 1nd1rectly j; 3 increase the interest rate, which in C b turn causes a reduction in borrowing . Tfiifland spending. {u- Astflw wi‘M- One of the reasons that the M“ Wnd curve slopes downwar ' - The open economy effect - Higher price levels result in foreigners’ desiring to buy £eww American-made goods While Americans desire MOW foreign-made goods (i.e., net exports gnu ). - Equivalent to a reduction in the amount of real goods and services purchased in the US. - What happens when the price level falls? - The QMW the total planned spending 10 Shifts in the Aggregate Demand Curve ' Any gem-emu leod change that increases aggregate spending (on domestic goods) shifts AD to the right. ' Any “0"” F” {We} change that decreases aggregate spending (on domestic goods) shifts AD to the left. 11 Shifts in the Aggregate Demand Curve: Factors Increasing Aggregate Demand - A drOp in the foreign exchange value of the dollar - Increased security about jobs and future income - Improvements in economic conditions in other countries - A reduction in real interest rates(nominal interest rates corrected for inflation) not due to price level change - Tax decreases {-ncnw.» - An increase in the amount of money in circulation 12 Shifts in the Aggregate Demand Curve GDP Deflator 90 0 1 2 3 4 5 6 7 Real GDP per Year(S trillions} Y} \F pop? (WNW SW 13 Long-Run Equilibrium: Prices, Output & Employment Now put Aggregate Demand and Long Run Aggregate S apply together LFi'AS Price Level 0 12 13 14 15 16 17 18 19 Real GDP per Year ($ trillions) . churs at the Intersection of the - Equilibrium price level is determined - Planned real expenditures for the economy are equal to total planned production along the economy’s trends growth path 14 The effects of economic growth on the price level ° Secular Deflation 4 - A persistent decline in prices resulting from ewwwgwfl’“ in the presence of stable aggregate demand - An increase in LRAS will, ceteris paribus, result in a decrease in the price level. LRAS1 160 \J 120 80 Price Level A0 L, 0 1516171819202122 Real GDP per Year (55 trillions) 15 haw Avoiding secular deflation Price Level 1'5151f1819 20 2'1 22 Real GDP par Year {$irilli0n3) “Mir [01'qu WE“ @u\¢0~[ WW} X 3 ii M MC 16 Causes of Inflation ° Supply—Side Inflation 180 160 140 Price Level 120 O 14 15 1B 17 18 19 Real GDP per Year (3 irillions) - A leftward shift could be caused by several factors: 1? - Demand—Side Inflation LFIAS Price Level I; C) ' | L,_1_L.__L._I_1_|_ 0 14 15 16 17 1a 19 Real G DP per Year (5 trillions) é - A rightward shift ’gould be caused by If - ~95 severa actors. fiwfl \ \ '5?!) ?L/} CW 99116 w”), (CW if“ MM L”ka 18 ...
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This note was uploaded on 12/21/2011 for the course ECON 202 taught by Professor Sonte during the Fall '11 term at UCSB.

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Ch 10 Notes (ECON E-202; Introduction to Macroeconomics; Wenyi Shen)

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