10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y"

Transcription

1 Facts about the business cycle Chapter 9: GD growth averages percent per year over the long run with large fluctuations in the short run. Consumption and investment fluctuate with GD, but consumption tends to be less volatile and investment more volatile than GD. Unemployment rises during recessions and falls during expansions. Okun s Law: the negative relationship between GD and unemployment. 1 Growth rates of real GD, consumption ercent change from 4 quarters earlier 8 verage 4 growth rate 2-2 Real GD Consumption Growth rates of real GD, consumption, investment ercent change from 4 quarters earlier Investment Real GD Consumption Unemployment Okun s Law ercent of labor force 12 8 ercentage change in 8 real GD u Change in unemployment rate 1

2 Index of Leading Economic Indicators ublished monthly by the Conference oard. ims to forecast changes in economic activity -9 months into the future. Used in planning by businesses and govt, despite not being a perfect predictor. Components of the LEI index verage workweek in manufacturing Initial weekly claims for unemployment insurance New orders for consumer goods and materials New orders, nondefense capital goods Vendor performance New building permits issued Index of stock prices M2 ield spread (-year minus 3-month) on Treasuries Index of consumer expectations 7 Index of Leading Economic Indicators 24 = Time horizons in macroeconomics Long run rices are flexible, respond to changes in supply or demand. Short run Many prices are sticky at a predetermined level. The economy behaves much differently when prices are sticky. Source: 3 Conference 197 oard Recap of classical macro theory (Chaps. 3-8) Output is determined by the supply side: supplies of capital, labor technology Changes in demand for goods & services (C, I, G ) only affect prices, not quantities. ssumes complete price flexibility. pplies to the long run. When prices are sticky output and employment also depend on demand, which is affected by: fiscal policy (G and T ) monetary policy (M ) other factors, like exogenous changes in C or I 11 2

3 The model of aggregate demand and supply The paradigm most mainstream economists and policymakers use to think about economic fluctuations and policies to stabilize the economy Shows how the price level and aggregate output are determined Shows how the economy s behavior is different in the short run and long run ggregate demand The aggregate demand curve shows the relationship between the price level and the quantity of output demanded. For this chapter s intro to the D/S model, we use a simple theory of aggregate demand based on the quantity theory of money. Chapters -12 develop the theory of aggregate demand in more detail The Quantity Equation as ggregate Demand The downward-sloping D curve From Chapter 4, recall the quantity equation MV = For given values of M and V, this equation implies an inverse relationship between and n increase in the price level causes a fall in real money balances (M/), causing a decrease in the demand for goods & services. D Shifting the D curve ggregate supply in the long run n increase in the money supply shifts the D curve to the right. Recall from Chapter 3: In the long run, output is determined by factor supplies and technology F ( K, L) is the full-employment or natural level of output, at which the economy s resources are fully employed. Full employment means that unemployment equals its natural rate (not zero)

4 The long-run aggregate supply curve Long-run effects of an increase in M does not depend on, so is vertical. In the long run, this raises the price level 2 1 n increase in M shifts D to the right. F ( K, L) 18 but leaves output the same. 19 ggregate supply in the short run The short-run aggregate supply curve Many prices are sticky in the short run. For now (and through Chap. 12), we assume all prices are stuck at a predetermined level in the short run. firms are willing to sell as much at that price level as their customers are willing to buy. Therefore, the short-run aggregate supply (SRS) curve is horizontal: The SRS curve is horizontal: The price level is fixed at a predetermined level, and firms sell as much as buyers demand. SRS 2 21 Short-run effects of an increase in M From the short run to the long run In the short run when prices are sticky, an increase in aggregate demand Over time, prices gradually become unstuck. When they do, will they rise or fall? In the short-run equilibrium, if then over time, will causes output to rise. 1 2 SRS rise fall remain constant The adjustment of prices is what moves the economy to its long-run equilibrium

5 The SR & LR effects of M > How shocking!!! = initial equilibrium shocks: exogenous changes in agg. supply or demand = new short- run eq m after Fed increases M C = long-run equilibrium 2 C 2 SRS Shocks temporarily push the economy away from full employment. Example: exogenous decrease in velocity If the money supply is held constant, a decrease in V means people will be using their money in fewer transactions, causing a decrease in demand for goods and services The effects of a negative demand shock Supply shocks D shifts left, depressing output and employment in the short run. Over time, prices fall and the economy moves down its demand curve toward fullemployment. 2 2 C SRS supply shock alters production costs, affects the prices that firms charge. (also called price shocks) Examples of adverse supply shocks: ad weather reduces crop yields, pushing up food prices. Workers unionize, negotiate wage increases. New environmental regulations require firms to reduce emissions. Firms charge higher prices to help cover the costs of compliance. Favorable supply shocks lower costs and prices CSE STUD: The 197s oil shocks Early 197s: OEC coordinates a reduction in the supply of oil. Oil prices rose 11% in % in % in 1975 Such sharp oil price increases are supply shocks because they significantly impact production costs and prices. 28 CSE STUD: The 197s oil shocks The oil price shock shifts SRS up, causing output and employment to fall. 2 In absence of SRS 2 further price SRS 1 1 shocks, prices will D fall over time and economy moves back toward full 2 employment. 29 5

6 CSE STUD: The 197s oil shocks redicted effects of the oil shock: inflation output unemployment 7% % 5% 4% 3% 2% and then a gradual recovery. % Unemployment rate (right scale) 12% 8% % 4% Change in oil prices (left scale) Inflation rate-ci (right scale) 3 CSE STUD: The 197s oil shocks % Late 197s: 5% s economy 4% was recovering, 3% oil prices shot up again, causing 2% another huge supply shock!!! % Change in oil prices (left scale) Inflation rate-ci (right scale) Unemployment rate (right scale) 14% 12% 8% % 4% 31 CSE STUD: The 198s oil shocks 198s: favorable supply shock-- a significant fall in oil prices. s the model predicts, inflation and unemployment fell: 4% 3% 2% % - -2% -3% -4% -5% Change in oil prices (left scale) Inflation rate-ci (right scale) Unemployment rate (right scale) 8% % 4% 2% % 32 Stabilization policy def: policy actions aimed at reducing the severity of short-run economic fluctuations. Example: Using monetary policy to combat the effects of adverse supply shocks 33 Stabilizing output with monetary policy Stabilizing output with monetary policy The adverse supply shock moves the economy to point SRS 2 SRS 1 ut the Fed accommodates the shock by raising agg. demand. results: is permanently higher, but remains at its fullemployment level C SRS

7 Chapter Summary 1. Long run: prices are flexible, output and employment are always at their natural rates, and the classical theory applies. Short run: prices are sticky, shocks can push output and employment away from their natural rates. 2. ggregate demand and supply: a framework to analyze economic fluctuations Chapter Summary 3. The aggregate demand curve slopes downward. 4. The long-run aggregate supply curve is vertical, because output depends on technology and factor supplies, but not prices. 5. The short-run aggregate supply curve is horizontal, because prices are sticky at predetermined levels. Chapter Summary. Shocks to aggregate demand and supply cause fluctuations in GD and employment in the short run. 7. The Fed can attempt to stabilize the economy with monetary policy. 7

macro Roadmap to this Lecture Time horizons Introduction to Economic Fluctuations In Classical Macroeconomic Theory, When prices are sticky

macro Roadmap to this Lecture Time horizons Introduction to Economic Fluctuations In Classical Macroeconomic Theory, When prices are sticky Roadmap to this Lecture macro Introduction to Economic Fluctuations We abandon the view that production is determined by technology and full employment of production factors (i.e., there can be unemployment

More information

Introduction to Economic Fluctuations. Time horizons. Aggregate Demand. Real GDP Growth in the United States Percent change from 4 quarters earlier

Introduction to Economic Fluctuations. Time horizons. Aggregate Demand. Real GDP Growth in the United States Percent change from 4 quarters earlier hapter 9 Introduction to Economic Fluctuations Learning Objectives difference between short run & long run introduction to aggregate demand aggregate supply in the short run & long run see how model of

More information

Lecture 10: Aggregate Demand and Aggregate Supply I

Lecture 10: Aggregate Demand and Aggregate Supply I EC201 Intermediate Macroeconomics EC201 Intermediate Macroeconomics Lecture 10: Aggregate Demand and Aggregate Supply I Lecture Outline: - how to derive the aggregate demand from the IS-LM model; - a preliminary

More information

CH 10 - REVIEW QUESTIONS

CH 10 - REVIEW QUESTIONS CH 10 - REVIEW QUESTIONS 1. The short-run aggregate supply curve is horizontal at: A) a level of output determined by aggregate demand. B) the natural level of output. C) the level of output at which the

More information

Questions for Review. CHAPTER 9 Introduction to Economic Fluctuations

Questions for Review. CHAPTER 9 Introduction to Economic Fluctuations HTER 9 Introduction to Economic Fluctuations Questions for Review 1. When GD declines during a recession, growth in real consumption and investment spending both decline; unemployment rises sharply. 2.

More information

CHAPTER 9 Introduction to Economic Fluctuations

CHAPTER 9 Introduction to Economic Fluctuations HTER 9 Introduction to Economic Fluctuations Questions for Review 1. The price of a magazine is an example of a price that is sticky in the short run and flexible in the long run. Economists do not have

More information

THREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS

THREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS 15 In this chapter, look for the answers to these questions: What are economic fluctuations? What are their characteristics? How does the model of demand and explain economic fluctuations? Why does the

More information

Long run v.s. short run. Introduction. Aggregate Demand and Aggregate Supply. In this chapter, look for the answers to these questions:

Long run v.s. short run. Introduction. Aggregate Demand and Aggregate Supply. In this chapter, look for the answers to these questions: 33 Aggregate Demand and Aggregate Supply R I N C I L E S O F ECONOMICS FOURTH EDITION N. GREGOR MANKIW Long run v.s. short run Long run growth: what determines long-run output (and the related employment

More information

2009 CHAPTER 11 Self Study Questions

2009 CHAPTER 11 Self Study Questions CHAPTER 11 Self Study Questions 1) The aggregate supply/aggregate demand model is used to help understand all of the following except A) inflation. B) business cycle fluctuations. C) the aggregate value

More information

Chapter 20. Short-Run Economic Fluctuations KEY FACTS ABOUT ECONOMIC FLUCTUATIONS

Chapter 20. Short-Run Economic Fluctuations KEY FACTS ABOUT ECONOMIC FLUCTUATIONS Chapter 2 urpose of Chapter 2: Develop a model that economists use to analyze the economy s short-run fluctuations - the model of demand and. Short-Run Economic Fluctuations Economic activity fluctuates

More information

Aggregate Demand and Aggregate Supply

Aggregate Demand and Aggregate Supply Demand and Supply Chapter 31 Copyright 21 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College

More information

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 2. The AD Curve. Aggregate Demand and Aggregate Supply

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 2. The AD Curve. Aggregate Demand and Aggregate Supply Agenda Aggregate Demand and Aggregate Supply The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, art 2 13-1 13-2 Aggregate Demand and Aggregate Supply The AD-AS model is derived from

More information

THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT

THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT 21 THE SHORT-RUN TRDEOFF ETWEEN INFLTION ND UNEMPLOYMENT LERNING OJECTIVES: y the end of this chapter, students should understand: why policymakers face a short-run tradeoff between inflation and unemployment.

More information

Assignment #3. ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice:

Assignment #3. ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice: ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma Assignment #3 Notice: (1) There are 25 multiple-choice problems and 2 analytic (short-answer) problems. This assignment is due on March

More information

THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL

THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL Previously The original Solow model focused on capital investment as the main source of economic growth. Modern growth theory now recognizes that institutions

More information

Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D.

Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D. Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D. Aggregate Demand and Aggregate Supply Economic fluctuations, also called business cycles, are movements of GDP away from potential

More information

Chapter 12 Aggregate Supply and Aggregate Demand

Chapter 12 Aggregate Supply and Aggregate Demand Chapter 12 Aggregate Supply and Aggregate Demand After reading Chapter 12, AGGREGATE SUPPLY AND AGGREGATE DEMAND, you should be able to: Use an Aggregate Demand and Aggregate Supply model to explain output,

More information

Macroeconomic Analysis Econ 6022 Level I

Macroeconomic Analysis Econ 6022 Level I 1 / 66 Macroeconomic Analysis Econ 6022 Level I Lecture 8 Fall, 2011 2 / 66 Business Cycle Analysis: A Preview What explains business cycle fluctuations? Two major business cycle theories - Classical theory

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Aggregate Supply Topic: Aggregate Supply/Aggregate Demand Model 1) The aggregate supply/aggregate demand model is used to help understand all of the following

More information

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth enabling us to produce more and more to achieve higher

More information

12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve

12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve Chapter 12 Monetary Policy and the Phillips Curve By Charles I. Jones Media Slides Created By Dave Brown Penn State University The short-run model summary: Through the MP curve the nominal interest rate

More information

VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY

VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY A. Aggregate Demand and Prices 1. The aggregate demand/inflation (ADI) curve -- graphical representation of the negative relationship (downward sloping

More information

Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

More information

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:

More information

The Macroeconomy in the Long Run The Classical Model

The Macroeconomy in the Long Run The Classical Model PP556 Macroeconomic Questions The Macroeconomy in the ong Run The Classical Model what determines the economy s total output/income how the prices of the factors of production are determined how total

More information

BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME

BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME BADM 527, Fall 2013 Name: Midterm Exam 2 November 7, 2013 Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME 1. According to classical theory, national income (Real

More information

Suggested Answers for Mankiw Questions for Review & Problems

Suggested Answers for Mankiw Questions for Review & Problems Suggested Answers for Mankiw & Problems The answers here will not have graphs, I encourage to refer to the text for graphs. There is a some math, however I don t expect you to replicate these in your exam,

More information

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment 1 Econ 302 Intermediate Macroeconomics Chul-Woo Kwon Ch.6 Aggregate Supply, Wages, rices, and Unemployment I. Introduction A. The dynamic changes of and the price adjustment B. Link between the price change

More information

Agenda. Business Cycles. What Is a Business Cycle? What Is a Business Cycle? What is a Business Cycle? Business Cycle Facts.

Agenda. Business Cycles. What Is a Business Cycle? What Is a Business Cycle? What is a Business Cycle? Business Cycle Facts. Agenda What is a Business Cycle? Business Cycles.. 11-1 11-2 Business cycles are the short-run fluctuations in aggregate economic activity around its long-run growth path. Y Time 11-3 11-4 1 Components

More information

Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis

Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Multiple Choice Questions 1. The FE line shows the level of output at which the market is in equilibrium. (a) Goods (b) Asset

More information

Chapter 13: Aggregate Demand and Aggregate Supply Analysis

Chapter 13: Aggregate Demand and Aggregate Supply Analysis Chapter 13: Aggregate Demand and Aggregate Supply Analysis Yulei Luo SEF of HKU March 25, 2013 Learning Objectives 1. Identify the determinants of aggregate demand and distinguish between a movement along

More information

Econ 102 Homework #9 AD/AS and The Phillips Curve

Econ 102 Homework #9 AD/AS and The Phillips Curve Econ 102 Homework #9 D/S and The Phillips Curve 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, D/S

More information

Answers. Event: a tax cut 1. affects C, AD curve 2. shifts AD right 3. SR eq m at point B. P and Y higher, unemp lower 4.

Answers. Event: a tax cut 1. affects C, AD curve 2. shifts AD right 3. SR eq m at point B. P and Y higher, unemp lower 4. A C T I V E L E A R N I N G 2: Answers Event: a tax cut 1. affects C, AD curve 2. shifts AD right 3. SR eq m at point B. P and Y higher, unemp lower 4. Over time, P E rises, SRAS shifts left, until LR

More information

Introduction to The IS-LM Model

Introduction to The IS-LM Model Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Economics 282 University of Alberta Introduction to The IS-LM Model This name originates from its basic equilibrium conditions:

More information

In the news. The Global Economy Aggregate Supply & Demand. Roadmap. In the news. In the news. In the news

In the news. The Global Economy Aggregate Supply & Demand. Roadmap. In the news. In the news. In the news In the news 50% 45% The Global Economy ggregate Supply & Demand Top 10% Income Share 40% 35% 30% Including capital gains Excluding capital gains 25% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967

More information

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #2

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #2 Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #2 1. If nominal wages cannot be cut, then the only way to cut real wages is by: A) inflation. B) unions. C) legislation. D)

More information

Problem Set 4. We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly.

Problem Set 4. We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly. Problem Set 4 Question 2 We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly. (a) The aggregate supply relation implies that an increase in

More information

Lecture 6: Economic Fluctuations. Rob Godby University of Wyoming

Lecture 6: Economic Fluctuations. Rob Godby University of Wyoming Lecture 6: Economic Fluctuations Rob Godby University of Wyoming Short-Run Economic Fluctuations Economic activity fluctuates from year to year. In some years, the production of goods and services rises.

More information

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis. 22.

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis. 22. Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis 22.1 Aggregate Demand 1) The aggregate demand curve is the total quantity of an economy's A)

More information

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money.

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money. Macroeconomics ECON 2204 Prof. Murphy Problem Set 4 Answers Chapter 10 #1, 2, and 3 (on pages 308-309) 1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand

More information

Aggregate Demand and Aggregate Supply Analysis

Aggregate Demand and Aggregate Supply Analysis Chapter 12 (24) Aggregate Demand and Aggregate Supply Analysis Chapter Summary During most years, prices rise (we have inflation) and real GDP increases (we have economic growth). The equilibrium level

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from

More information

Aggregate Demand and Aggregate Suppy

Aggregate Demand and Aggregate Suppy chapter 12 (28) Demand and Suppy Chapter Objectives Students will learn in this chapter: How the aggregate demand curve illustrates the relationship between the aggregate and the quantity of aggregate

More information

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 3. Disequilibrium in the AD-AS model

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 3. Disequilibrium in the AD-AS model Agenda The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, art 3 rice Adjustment and the Attainment of General Equilibrium 13-1 13-2 General equilibrium in the AD-AS model Disequilibrium

More information

Module 29(65) The AD AS Model. Module Objectives. Module Outline. I. The AD AS Model

Module 29(65) The AD AS Model. Module Objectives. Module Outline. I. The AD AS Model Module 29(65) The AS Model Module Objectives What students will learn: The difference between short-run and long-run macroeconomic equilibrium The causes and effects of demand shocks and supply shocks

More information

INTRODUCTION AGGREGATE DEMAND MACRO EQUILIBRIUM MACRO EQUILIBRIUM THE DESIRED ADJUSTMENT THE DESIRED ADJUSTMENT

INTRODUCTION AGGREGATE DEMAND MACRO EQUILIBRIUM MACRO EQUILIBRIUM THE DESIRED ADJUSTMENT THE DESIRED ADJUSTMENT Chapter 9 AGGREGATE DEMAND INTRODUCTION The Great Depression was a springboard for the Keynesian approach to economic policy. Keynes asked: What are the components of aggregate demand? What determines

More information

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 1. When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce

More information

chapter: Aggregate Demand and Aggregate Supply Krugman/Wells 2009 Worth Publishers 1 of 58

chapter: Aggregate Demand and Aggregate Supply Krugman/Wells 2009 Worth Publishers 1 of 58 chapter: 12 >> Aggregate Demand and Aggregate Supply Krugman/Wells 2009 Worth Publishers 1 of 58 WHAT YOU WILL LEARN IN THIS CHAPTER How the aggregate demand curve illustrates the relationship between

More information

Use the following to answer question 9: Exhibit: Keynesian Cross

Use the following to answer question 9: Exhibit: Keynesian Cross 1. Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in

More information

Chapter 12 Unemployment and Inflation

Chapter 12 Unemployment and Inflation Chapter 12 Unemployment and Inflation Multiple Choice Questions 1. The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by (a) A.W. Phillips. (b) Edmund Phelps. (c)

More information

b) What happens to the level of output and the price level in the short run and in the long run?

b) What happens to the level of output and the price level in the short run and in the long run? 1) Suppose the Fed reduces the money supply by 5 percent. a) What happens to the aggregate demand curve? If the Fed reduces the money supply, the aggregate demand curve shifts down. This result is based

More information

LECTURE NOTES ON MACROECONOMIC PRINCIPLES

LECTURE NOTES ON MACROECONOMIC PRINCIPLES LECTURE NOTES ON MACROECONOMIC PRINCIPLES Peter Ireland Department of Economics Boston College peter.ireland@bc.edu http://www2.bc.edu/peter-ireland/ec132.html Copyright (c) 2013 by Peter Ireland. Redistribution

More information

Macroeconomics, 6e (Abel et al.) Chapter 12 Unemployment and Inflation Unemployment and Inflation: Is There a Trade-off?

Macroeconomics, 6e (Abel et al.) Chapter 12 Unemployment and Inflation Unemployment and Inflation: Is There a Trade-off? Macroeconomics, 6e (Abel et al.) Chapter 12 Unemployment and Inflation 12.1 Unemployment and Inflation: Is There a Trade-off? 2) Phillipsʹs research looked at British data on A) unemployment and inflation.

More information

Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand Aggregate Supply and Aggregate Demand Econ 120: Global Macroeconomics 1 1.1 Goals Goals Specific Goals Be able to explain GDP fluctuations when the price level is also flexible. Explain how real GDP and

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35 questions, each 1.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35 questions, each 1. AUBG ECO 302 A F I N A L E X A M Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35 questions, each 1.5 points 1) The Bigdrill company drills

More information

Using Policy to Stabilize the Economy

Using Policy to Stabilize the Economy Using Policy to Stabilize the Economy Since the Employment ct of 1946, economic stabilization has been a goal of U.S. policy. Economists debate how active a role the govt should take to stabilize the economy.

More information

Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics

Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics roblem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics 1) Explain the differences between demand-pull inflation and cost-push inflation. Demand-pull inflation results

More information

Chapter 12: Aggregate Supply and Phillips Curve

Chapter 12: Aggregate Supply and Phillips Curve Chapter 12: Aggregate Supply and Phillips Curve In this chapter we explain the position and slope of the short run aggregate supply (SRAS) curve. SRAS curve can also be relabeled as Phillips curve. A basic

More information

Answers to Text Questions and Problems in Chapter 11

Answers to Text Questions and Problems in Chapter 11 Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to short-run equilibrium output) to inflation. As inflation

More information

5. Aggregate Supply and Demand. Aggregate Supply and Demand. Output and prices are determined by aggregate supply and aggregate demand.

5. Aggregate Supply and Demand. Aggregate Supply and Demand. Output and prices are determined by aggregate supply and aggregate demand. Supply and, and C HATER 5 Aggregate Supply and CHATER HIGHLIGHTS Output and prices are determined by aggregate supply and aggregate demand. In the short run, the aggregate supply curve is flat. In the

More information

What causes the business cycle? Why did U.S. economy go into recession in 2008?

What causes the business cycle? Why did U.S. economy go into recession in 2008? What causes the business cycle? Why did U.S. economy go into recession in 2008? Aggregate Supply and 13 Aggregate Demand When you have completed your study of this chapter, you will be able to CHAPTER

More information

150 points. Please write answers in ink. Allocate your time efficiently. Good luck.

150 points. Please write answers in ink. Allocate your time efficiently. Good luck. Eco 202 Name Final Exam Key 10 May 2004 150 points. Please write answers in ink. Allocate your time efficiently. Good luck. 1. Suppose that Congress passes an investment tax credit, which subsidizes domestic

More information

Chapter 3 AGGREGATE DEMAND AND

Chapter 3 AGGREGATE DEMAND AND Chapter 3 AGGREGATE DEMAND AND AGGREGATE G SULY Dr. Mohammed Alwosabi The aggregate demand and aggregate supply (-AS) model determines RGD and GD Deflator and helps us understand the performance of three

More information

Extra Problems #3. ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice:

Extra Problems #3. ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice: ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma Extra Problems #3 Notice: (1) There are 25 multiple-choice problems covering Chapter 6, 9, 10, 11. These problems are not homework and

More information

Agenda. Unemployment and Inflation, Part 1. Unemployment and Inflation. Unemployment and Inflation. Unemployment and Inflation:

Agenda. Unemployment and Inflation, Part 1. Unemployment and Inflation. Unemployment and Inflation. Unemployment and Inflation: Agenda Unemployment and Inflation, Part 1 : Is There a Trade-Off? 15-1 15-2 Is there a trade-off between inflation and unemployment? In 1958, A.W. Phillips found a negative relationship between unemployment

More information

The AS AD Model. Aggregate Supply & Aggregate Demand. Classical View of Recessions. Long-Run Macroeconomic equilibrium

The AS AD Model. Aggregate Supply & Aggregate Demand. Classical View of Recessions. Long-Run Macroeconomic equilibrium The AS AD Model Aggregate Supply & Aggregate Demand The AS-AD model uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations. Chapter 11 Long-Run Macroeconomic

More information

Econ 102 Aggregate Supply and Demand

Econ 102 Aggregate Supply and Demand Econ 102 ggregate Supply and Demand 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, ggregate Supply

More information

The Short-Run Trade-off between Inflation and Unemployment

The Short-Run Trade-off between Inflation and Unemployment HPTER 35 The Short-Run Trade-off between Inflation and Goals in this chapter you will Learn why policymakers face a short-run trade-off between infl ation and unemployment onsider why the infl ation-unemployment

More information

Solutions to Spring 2015 Week 13 Tutorial Questions (Ch9)

Solutions to Spring 2015 Week 13 Tutorial Questions (Ch9) Chapter 9: Q1: Macroeconomics P.324 Review Questions #6 Q2: Macroeconomics P.324 Review Questions #7 Q3: Macroeconomics P.324 Review Questions #8 Q4: Macroeconomics P.325 Numerical Problems #1 Q5: Macroeconomics

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity

Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Multiple Choice Questions 1. Keynesians are skeptical of the classical theory that recessions are periods of increased mismatch between

More information

Chapter Outline. Chapter 11. Real-Wage Rigidity. Real-Wage Rigidity

Chapter Outline. Chapter 11. Real-Wage Rigidity. Real-Wage Rigidity Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian 2008 Pearson Addison-Wesley. All rights

More information

Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0

Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0 22 The Short-Run Trade-off Between Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0 In this chapter, look for the answers to these questions: How are inflation and unemployment related in

More information

Aggregate Demand & Aggregate Supply

Aggregate Demand & Aggregate Supply Aggregate Demand & Aggregate Supply (the basics) slope of the aggregate supply (AS) curve aggregate supply (AS) - The total quantity of goods and services that firms are willing to supply at varying price

More information

Chapter 11. Keynesianism: The Macroeconomics of Wage and Price Rigidity. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 11. Keynesianism: The Macroeconomics of Wage and Price Rigidity. 2008 Pearson Addison-Wesley. All rights reserved Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian Model The Keynesian Theory of Business

More information

2. According to the dynamic AD Curve, if M + v = 7%, while real growth = 2%, what must inflation be equal to?

2. According to the dynamic AD Curve, if M + v = 7%, while real growth = 2%, what must inflation be equal to? Homework 11 1. In economic terms, menu costs are A. the cost of services listed in a menu. B. the costs to producer of changing prices. C. the cost of goods listed on a business rate sheet. D. the price

More information

Macro Chapter 10 study guide questions

Macro Chapter 10 study guide questions Macro Chapter 10 study guide questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which of the following will reduce aggregate demand? a. an increase

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Inflation can be started by 1) A) an increase in aggregate supply or a decrease in aggregate

More information

Aggregate Demand and Aggregate Supply

Aggregate Demand and Aggregate Supply CHAPTER 33 Aggregate Demand and Aggregate Supply Goals in this chapter you will Learn three key facts about short-run fluctuations Consider how the economy in the short run differs from the economy in

More information

The Aggregate Demand- Aggregate Supply (AD-AS) Model

The Aggregate Demand- Aggregate Supply (AD-AS) Model The AD-AS Model The Aggregate Demand- Aggregate Supply (AD-AS) Model Chapter 9 The AD-AS Model addresses two deficiencies of the AE Model: No explicit modeling of aggregate supply. Fixed price level. 2

More information

Aggregate Demand I: Building the IS-LM Model

Aggregate Demand I: Building the IS-LM Model CHAPTER 11 : Building the IS-LM Model Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: the IS curve and its relation to: the Keynesian cross

More information

Chapter 22. Aggregate Demand and Supply Analysis

Chapter 22. Aggregate Demand and Supply Analysis Chapter 22 Aggregate Demand and Supply Analysis Aggregate Demand The relationship between the quantity of aggregate output demanded and the price level when all other variables are held constant Based

More information

I d ( r; MPK f, τ) Y < C d +I d +G

I d ( r; MPK f, τ) Y < C d +I d +G 1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

More information

Ch.5 Aggregate Supply and Demand

Ch.5 Aggregate Supply and Demand 1 Econ 302 Intermediate Macroeconomics Chul-Woo Kwon Ch.5 Aggregate Supply and Demand I. Introduction We studied an economy when the goods and services markets are simultaneously in equilibrium given prices.

More information

Macroeconomics: Aggregate Demand & Aggregate Supply

Macroeconomics: Aggregate Demand & Aggregate Supply RGDP HOSP 2207 (Economics) Learning Centre Macroeconomics: Aggregate Demand & Aggregate Supply The level of real GDP attained when an economy is at full capacity is called the full capacity GDP or potential

More information

Pre-Test Chapter 15 ed17

Pre-Test Chapter 15 ed17 Pre-Test Chapter 15 ed17 Multiple Choice Questions 1. The extended AD-AS model: A. distinguishes between short-run and long-run aggregate demand. B. explains inflation but not recession. C. includes G

More information

Aggregate Supply, Aggregate Demand, and Inflation: Putting It All Together Principles of Economics in Context (Goodwin, et al.)

Aggregate Supply, Aggregate Demand, and Inflation: Putting It All Together Principles of Economics in Context (Goodwin, et al.) Chapter 28 Aggregate Supply, Aggregate Demand, and Inflation: Putting It All Together Principles of Economics in Context (Goodwin, et al.) Chapter Overview This chapter introduces you to the "Aggregate

More information

Problem Set for Chapter 20(Multiple choices)

Problem Set for Chapter 20(Multiple choices) Problem Set for hapter 20(Multiple choices) 1. According to the theory of liquidity preference, a. if the interest rate is below the equilibrium level, then the quantity of money people want to hold is

More information

Econ 100B: Macroeconomic Analysis Fall Problem Set #3 ANSWERS (Due September 15-16, 2008)

Econ 100B: Macroeconomic Analysis Fall Problem Set #3 ANSWERS (Due September 15-16, 2008) Econ 100B: Macroeconomic Analysis Fall 2008 Problem Set #3 ANSWERS (Due September 15-16, 2008) A. On one side of a single sheet of paper: 1. Clearly and accurately draw and label a diagram of the Production

More information

Aggregate Demand and Aggregate Supply Analysis

Aggregate Demand and Aggregate Supply Analysis Aggregate Demand and Aggregate Supply Analysis This lecture develops an aggregate demand and aggregate supply model to study the effects of monetary policy on output and inflation. Aggregate Supply A.

More information

Inflation, Unemployment, and Federal Reserve Policy

Inflation, Unemployment, and Federal Reserve Policy Chapter 16 (28) Inflation, Unemployment, and Federal Reserve Policy Chapter Summary Inflation and unemployment are two very important macroeconomic issues. The Phillips curve illustrates the short-run

More information

Macroeconomics Topic 8: Explain how slow price adjustments might affect the short-run response of the economy to economic shocks.

Macroeconomics Topic 8: Explain how slow price adjustments might affect the short-run response of the economy to economic shocks. Macroeconomics Topic 8: Explain how slow price adjustments might affect the short-run response of the economy to economic shocks. Reference: Gregory Mankiw s Principles of Microeconomics, 2 nd edition,

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Econ 111 Summer 2007 Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The classical dichotomy allows us to explore economic growth

More information

Macroeconomics CHAPTER 10. Aggregate Supply and Aggregate Demand. Aggregate Supply. The Short-Run Aggregate Supply Curve

Macroeconomics CHAPTER 10. Aggregate Supply and Aggregate Demand. Aggregate Supply. The Short-Run Aggregate Supply Curve Aggregate Supply Macroeconomics CHAPTER 10 The aggregate supply curve shows the relationship aggregate output. Aggregate Supply and Aggregate Demand 3 What you will learn in this chapter: How the aggregate

More information

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5 Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

More information

Chapter 3 A Classical Economic Model

Chapter 3 A Classical Economic Model Chapter 3 A Classical Economic Model what determines the economy s total output/income how the prices of the factors of production are determined how total income is distributed what determines the demand

More information

In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks.

In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. Chapter 11: Applying IS-LM Model In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. We also learn how the IS-LM model

More information

Mods Practice

Mods Practice Mods 17-18-19 Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The aggregate demand curve shows the relationship between the aggregate price level

More information

Questions. True/False and Explain

Questions. True/False and Explain 166 CHAPTER 11 (27) Questions True/False and Explain Aggregate Supply 11. At full employment, there is no unemployment. 12. Along the LAS curve, a rise in the price level and all resource prices increase

More information