CHAPTER 11-AGGREGATE SUPPLY AND AGGREGATE DEMAND - PowerPoint PPT Presentation

Loading...

PPT – CHAPTER 11-AGGREGATE SUPPLY AND AGGREGATE DEMAND PowerPoint presentation | free to download - id: 7d1dee-ZWZlM



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

CHAPTER 11-AGGREGATE SUPPLY AND AGGREGATE DEMAND

Description:

chapter 11-aggregate supply and aggregate demand i. introduction to the ad/as model a. the ad/as model is a variable price model. the ae model assumes a constant price. – PowerPoint PPT presentation

Number of Views:39
Avg rating:3.0/5.0
Slides: 9
Provided by: pcma335
Learn more at: http://images.pcmac.org
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: CHAPTER 11-AGGREGATE SUPPLY AND AGGREGATE DEMAND


1
  • CHAPTER 11-AGGREGATE SUPPLY AND
    AGGREGATE DEMAND
  • I. INTRODUCTION TO THE AD/AS MODEL
  • A. THE AD/AS MODEL IS A VARIABLE PRICE
    MODEL. THE
  • AE MODEL ASSUMES A CONSTANT PRICE.
  • B. THE AD/AS MODEL ILLUSTRATES INFLATION,
  • UNEMPLOYMENT AND ECONOMIC GROWTH.
  • II. AGGREGATE DEMAND IS A SCHEDULE THAT SHOWS THE
  • VARIOUS AMOUNTS OF REAL DOMESTIC OUTPUT THAT
  • DOMESTIC AND FOREIGN BUYERS WILL DESIRE TO
  • PURCHASE AT EACH POSSIBLE PRICE LEVEL.
  • A. THE AGGREGATE DEMAND CURVE IS SHOWN BELOW

PRICE LEVEL
AD
0
REAL GDP AND EMPLOYMENT
2
  • 1. IT SHOWS AN INVERSE RELATIONSHIP BETWEEN
  • PRICE LEVEL AND DOMESTIC
    OUTPUT
  • 2. THE EXPLANATION FOR THE INVERSE RELATIONSHIP
  • IS NOT THE SAME AS FOR
    DEMAND FOR A SINGLE
  • PRODUCT, WHICH CENTERED ON
    SUBSTITUTION AND
  • INCOME EFFECTS
  • a. SUBSTITUTION EFFECT DOESNT APPLY
  • SINCE
    THERE IS NO SUBSTITUTE FOR

  • EVERYTHING
  • b. INCOME EFFECT ALSO DOESNT APPLY IN
  • THE
    AGGREGATE CASE SINCE INCOME NOW
  • VARIES
    WITH AGGREGATE OUTPUT
  • 3. WHAT IS THE EXPLANATION FOR THE INVERSE
  • RELATIONSHIP BETWEEN THE
    PRICE LEVEL AND REAL
  • OUTPUT IN AGGREGATE DEMAND?
  • a. REAL BALANCES EFFECT WHEN PRICE
  • LEVEL
    FALLS, THE PURCHASING POWER OF
  • EXISTING
    FINANCIAL BALANCES RISES,
  • WHICH CAN INCREASE SPENDING

3
  • 2. DRAW GRAPHS TO SHOW RELATIONSHIP USING ONE
  • GRAPH OVER THE OTHER

LINE
45
0
AE1
AE
AE2
AE3
REAL GDP
PL
AD3
AD2
AD1
AD
REAL GDP
4
  • 2. P
  • 3. PRICES RISE AGAIN-SAME MECHANISM
  • C. DETERMINANTS OF AGGREGATE DEMAND
  • 1. CHANGES IN COMSUMER SPENDING CAUSED BY
  • CHANGES IN SEVERAL FACTORS
  • a. CONSUMER WEALTH
  • b. CONSUMER EXPECTATIONS
  • c. CONSUMER INDEBTEDNESS
  • d. TAXES
  • 2. CHANGES IN INVESTMENT SPENDING CAUSED BY
  • CHANGES IN SEVERAL FACTORS
  • a. INTEREST RATES
  • b. PROFIT EXPECTATIONS
  • c. BUSINESS TAXES
  • d. TECHNOLOGY

PURCHASING POWER
IR
X
N
5
  • D. AGGREGATE DEMAND SHIFTS AND THE AGGREGATE
    EXPENDITURES MODEL
  • 1. WHEN THERE IS A CHANGE IN ONE OF THE
  • DETERMINANTS OF DEMAND
    THERE WILL BE A CHANGE
  • IN AGGREGATE EXPENDITURES
    AS WELL
  • 2. IF PRICE REMAINS CONSTANT, THEN A CHANGE IN
  • AGGREGATE EXPENDITURES IS
    MULTIPLIED AND REAL
  • OUTPUT RISES BY MORE THAN
    THE INITIAL CHANGE IN
  • SPENDING. (MULTIPLIER
    EFFECT)
  • III. AGGREGATE SUPPLY IS A SCHEDULE SHOWING
    LEVELS OF REAL
  • DOMESTIC OUTPUT AVAILABLE AT EACH POSSIBLE
    PRICE LEVEL
  • A. AGGREGATE SUPPLY CURVE MAY BE VIEWED AS
    HAVING THREE DISTINCT SEGMENTS

PRICE LEVEL
REAL GDP AND EMPLOYMENT
1. HORIZONTAL RANGE WHERE THE PRICE LEVEL
REMAINS CONSTANT WITH
SUBSTANTIAL OUTPUT
VARIATION. IN THIS RANGE SUBSTANTIAL
UNEMPLOYMENT AND EXCESS CAPACITY
EXISTS. THE ECONOMY IS
OPERATING FAR BELOW FULL
EMPLOYMENT.
6
  • 2. INTERMEDIATE (UPSLOPING) RANGE WHERE THE
  • EXPANSION OF REAL OUTPUT IS
    ACCOMPANIED BY
  • RISING PRICE LEVEL, NEAR TO
    WHERE THE
  • FULL EMPLOYMENT LEVEL OF
    OUTPUT EXISTS. PER
  • UNIT PRODUCTION COSTS RISE
    IN THIS STAGE
  • BECAUSE AS RESOURCE MARKETS
    NEAR FULL
  • EMPLOYMENT THEIR PRICES
    WILL BE BID UP (LESS
  • RESOURCES-GREATER
    DEMAND-HIGHER COST)
  • 3. VERTICAL RANGE WHERE ABSOLUTE FULL
    CAPACITY
  • IS ASSUMED AND ANY ATTEMPT
    TO INCREASE OUTPUT
  • WILL BID UP RESOURCE AND
    PRODUCT PRICES
  • (INFLATION). WE ASSUME FULL
    EMPLOYMENT OCCURS
  • AT THE NATURAL RATE OF
    UNEMPLOYMENT.
  • B. DETERMINANTS OF AGGREGATE SUPPLY THE OTHER
  • THINGS BESIDES PRICE LEVEL THAT CAUSE
    CHANGES OR
  • SHIFTS IN AGGREGATE SUPPLY
  • 1. A CHANGE IN INPUT PRICES, WHICH CAN BE
    CAUSED
  • BY CHANGES IN SEVERAL
    FACTORS
  • a. AVAILABILITY OF RESOURCES (LAND,

7
  • IV. EQUILIBRIUM REAL OUTPUT AND THE PRICE LEVEL
  • A. EQUILIBRIUM PRICE AND QUANTITY WHERE THE
    AGGREGATE DEMAND AND AGGREGATE SUPPLY CURVES
    INTERSECT.

AS
PRICE LEVEL
AD
FE
REAL GDP
  • SHIFTING AGGREGATE DEMAND WHEN A DETERMINANT
  • CHANGES WILL CHANGE THE EQUILIBRIUM.
  • DEMAND PULL INFLATION SHIFTS IN THE
    INTERMEDIATE
  • AND VERTICAL RANGES WILL CAUSE DEMAND PULL
  • INFLATION WITH AN INCREASE IN AGGREGATE
    DEMAND.
  • 3. SHIFTS IN THE HORIZONTAL RANGE WILL CAUSE
    QUANTITY
  • CHANGES, BUT NOT PRICE LEVEL.

8
  • B. THE MULTIPLIER EFFECT IS WEAKENED WITH PRICE
    LEVEL CHANGES IN THE INTERMEDIATE AND VERTICAL
    RANGES (NO MULTIPLIER EFFECT). REAL GDP DOES NOT
    CHANGE AS MUCH AS IN OTHER INSTANCES.
    CONCLUSION THE MORE
  • PRICE LEVEL INCREASES, THE LESS EFFECT ANY
    INCREASE IN AGGREGATE DEMAND WILL HAVE IN
    INCREASING REAL GDP.
  • C. DECREASES IN AD IF AD DECREASES, RECESSION
    AND CYCLICAL UNEMPLOYMENT MAY RESULT. PRICES
    DONT FALL EASILY (RACHET EFFECT)
  • 1. WAGE CONTRACTS ARE NOT FLEXIBLE SO
  • BUSINSESSES CANT AFFORD TO
    REDUCE PRICES.
  • 2. ALSO, EMPLOYERS ARE RELUCTANT TO CUT WAGES
  • BECAUSE OF IMPACT ON
    EMPLOYEE EFFORT,
  • MORALE, ETC
  • 3. MINIMUM WAGES KEEP WAGES ABOVE A CERTAIN
  • LEVEL
  • 4. SO CALLED MENU COSTS ARE DIFFICULT TO CHANGE
  • 5. FEAR OF PRICE WARS KEEP PRICES FROM BEING
  • REDUCED.
  • C. SHIFTING AGGREGATE SUPPLY OCCURS WHEN A
    SUPPLY DETERMINANT CHANGES
  • 1. LEFTWARD SHIFT ILLUSTRATES COST-PUSH
    INFLATION
  • 2. RIGHTWARD SHIFT IN CURVE WILL CAUSE A
    DECLINE
  • IN PRICE LEVEL.
About PowerShow.com