Ch 10-- Shifts in AS & AD

Ch 10-- Shifts in AS & AD - 11/10/2009 Ch. 10...

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Unformatted text preview: 11/10/2009 Ch. 10 Factors that Affect AS AD AS & AD How do we find equilibrium in the How do we find equilibrium in the G & S market? market? (things that cause AS & AD to shift) How do we find equilibrium in the G & S market? LR (and SR) equilibrium in the G & S market: Pt. 2 (and • Since we have both a SRAS and • APL LRAS, we will have 2 equilibriums…both a SR and a LR When we are in LR equilibrium LRAS SRAS – Actual GDP = Potential GDP (about 3% GR) (about – Actual unemployment rate = NRU (about 5%) – All three curves intersect at the same place – LRAS, SRAS and AD are all equal AD 1 2 3 Y = Real GDP Factors that Shift AD Factors that Shift AD 1. Changes in real wealth 1. Changes in real wealth 2. Changes in the real interest rate 3. Changes in expectations (about future 4. 5. direction of the economy) direction of the economy) Changes in the expected rate of inflation Changes in income abroad 1 11/10/2009 If real wealth decreases, AD decreases….. APL If real wealth increases, AD increases….. APL LRAS LRAS SRAS SRAS At Pt. 1, Actual GDP Actual GDP < Potential Potential GDP Cyclical UnemployUnemployment is present Pt. 1 is below the below the trend trend line on the business cycle….and inside the PPC AD1 AD2 1 2 3 Cyclical UnemployUnemployment is not present AD2 1 2 3 LRAS SRAS At Pt. 3, Actual GDP Actual GDP > Potential Potential GDP SRAS AD2 NO Cyclical UnemployUnemployment is present AD1 1 2 3 Pt. 3 is above the above the trend trend line on the business cycle….and beyond the PPC At Pt. 3, Actual GDP Actual GDP > Potential Potential GDP AD2 NO Cyclical UnemployUnemployment is present AD1 Y = Real GDP 1 If people expect an increase in inflation in the FUTURE, people spend more NOW (AD ↑) APL 2 3 SRAS AD2 AD1 1 2 3 Y = Real GDP LRAS SRAS NO Cyclical UnemployUnemployment is present Pt. 3 is above the above the trend trend line on the business cycle….and beyond the PPC If income abroad decreases, AD HERE decreases….. APL LRAS At Pt. 3, Actual GDP Actual GDP > Potential Potential GDP Y = Real GDP If people expect the economy to expand in the near future, AD ↑ now as businesses expand current investment for future increase in expenditures APL LRAS Pt. 3 is above the above the trend trend line on the business cycle….and outside the PPC AD1 Y = Real GDP If the real interest rate declines, people borrow more in order to SPEND more (AD ↑) APL At Pt. 3, Actual GDP Actual GDP > Potential Potential GDP Pt. 3 is above the above the trend trend line on the business cycle….and beyond the PPC Y = Real GDP At Pt. 1, Actual GDP Actual GDP < Potential Potential GDP Cyclical UnemployUnemployment is present AD1 Pt. 1 is below the below the trend trend line on the business cycle….and inside the PPC AD2 1 2 3 Y = Real GDP 2 11/10/2009 Things that cause A.S. to shift: 1. Changes in resource prices (or changes in the cost of production) 2. Changes in the expected rate of inflation 3. Supply shocks As resource prices increase, cost of production rises and output falls….. SRAS2 APL LRAS SRAS1 At Pt. 1, Actual GDP Actual GDP < Potential Potential GDP Cyclical UnemployUnemployment is present AD 1 Supply Shock: hurricane wipes out crops in the southeast….. APL 2 SRAS2 LRAS SRAS1 SRAS1 At Pt. 1, Actual GDP Actual GDP < Potential Potential GDP Cyclical UnemployUnemployment is present Pt. 1 is below the below the trend trend line on the business cycle….and inside the PPC AD1 1 2 Y = Real GDP 3 Y = Real GDP 3 If businesses expect inflation to RISE in the future…..the price of their product will be higher in the future and they will be less motivated to sell NOW. SRAS decreases. APL SRAS2 LRAS Pt. 1 is below the below the trend trend line on the business cycle….and inside the PPC At Pt. 1, Actual GDP Actual GDP < Potential Potential GDP Cyclical UnemployUnemployment is present AD1 1 2 3 Pt. 1 is below the below the trend trend line on the business cycle….and inside the PPC Y = Real GDP If businesses expect inflation to FALL in the future…..the price of their product will be higher NOW and they will be less motivated to sell later. SRAS Increases now. APL LRAS SRAS1 SRAS2 At Pt. 3, Potential Potential GDP GDP < Actual GDP Cyclical UnemployUnemployment is not present AD 1 2 3 Pt. 3 is above the above the trend trend line on the business cycle….and outside the PPC End of Ch. 10 (but soon read Ch. 10 soon read Ch. 10 pp. 228 – end of chapter) chapter) Y = Real GDP Real 3 ...
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This note was uploaded on 04/02/2012 for the course ECO 2013 taught by Professor Slate during the Fall '10 term at Florida State College.

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