The dollar appreciates - NX fall the dollar depreciates - NX rises How many of the following will shift the AD curve right ? US $ depreciates relative to the euro 19
Foreign income rises transfer payments rise wealth rises number of firms decreases taxes fall Summary AD = C + I + G +NX Each of the following shifts AD right Fiscal Policy- more G, less T (via C & I), transfers rise (via C) Monetary Policy - lower interest rates = more consumption Others - wealth increases (via C) population increases (via C) number of firms increases (via I) for C. Short-Run Aggregate Supply (SRAS) Increasing total spending (i.e. more AD) can increase real GDP, and thus reduce unemployment Aggregate supply = all production If AD grew more than the economy could produce, prices level would rise definition: the short run aggregate supply curve (SRAS) shows how much the economy can produce at different values of the price level (P). In general, the price firms sell their final goods for, (their output; all firms: P) is more than flexible than the cost of their inputs. wages and some other costs are “sticky.” 20
When Price level (P) increases in the short run, costs rise less than P increases, profits rise and production rises . Profits = revenue - costs In summary: P increases, Y increases, an SRAS is upward sloped -with aggregate supply, Y is output (production) -with aggregate demand, Y is spending measure both with real GDP spending = production in equilibrium Say K or L increase, or technological change (measured by TFP (A)) happened. SRAS shifts right and we do keep P constant. If costs to businesses increases, for the same P they would cut production. Or, for the same output (Y) they would raise prices. Shifts: Types of costs to businesses -costs in general (wages and capital) • energy prices (sudden change: shock) • expected increases in costs do to predicted inflation (i.e.. P increases) Increase in K, L, or technological change— shift SRAS right increase in costs to business (wages, capital, energy) — shift SRAS left There are others, but we will only do these! 21
D. Static Equilibrium How do AD and SRAS work together? What influences average prices P and production & spending Y? see worksheet Definition: equilibrium is where all spending AD equals all production SRAS It is reached by P changing until AD = SRAS equilibrium tells you the values of P and Y. economy stays in eq. until there is a shift in the curve Energy (oil) proc shock: 1973, 1979, 1990, 2008 one of the most common causes of recessions E. Dynamic AD and SRAS Why has this current expansion been so slow? Q: Which is ht most realistic for the US economy since 1970? 22
A: SRAS curve has shifted right (more technology, productivity) and AD shifts right (greater population, consumption) in most years. • why inflation?? The Fed stimulates the economy a bit so more growth in AD than SRAS - part of their dual mandate (2% inflation) Dynamic AD and SRAS: how these curves move over the years — usually growth and inflation F. Slow Growth in This Expansion currently- unemployment rate- normal (5.1%) labor force participation- low long term unemployment-high
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