2 Learning Objectives Explain what determines aggregate supply Explain what determines aggregate demand Explain what determines real GDP and the price level and how economic growth, inflation, and the business cycle arise Describe the main schools of thought in macroeconomics today
3 Aggregate Supply Quantity Supplied and Supply The quantity of real GDP supplied is the total quantity that firms plan to produce during a given period. Aggregate supply is the relationship between the quantity of real GDP supplied and the price level. We distinguish two time frames associated with different states of the labour market: Long-run aggregate supply Short-run aggregate supply
4 Aggregate Supply Long-Run Aggregate Supply Long-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP. Potential GDP is independent of the price level. So the long-run aggregate supply curve (LAS) is vertical at potential GDP.
5 Aggregate Supply Short-Run Aggregate Supply Short-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant. A rise in the price level with no change in the money wage rate and other factor prices increases the quantity of real GDP supplied. The short-run aggregate supply curve (SAS) is upward sloping.
6 Aggregate Supply In the long run, the quantity of real GDP supplied is potential GDP. As the price level rises and the money wage rate change by the same percentage, the quantity of real GDP supplied remains at potential GDP.
7 Aggregate Supply In the short run, the quantity of real GDP supplied increases if the price level rises. The SAS curve slopes upward. A rise in the price level with no change in the money wage rate induces firms to increase production.
8 Aggregate Supply Changes in Aggregate Supply Aggregate supply changes if an influence on production plans other than the price level changes. These influences include Changes in potential GDP Changes in money wage rate (and other factor prices)
9 Aggregate Supply Changes in Potential GDP When potential GDP increases, both the LAS and SAS curves shift rightward. Potential GDP increases if: The full-employment quantity of labour increases The quantity of capital (physical or human) increases An advance in technology occurs
10 Aggregate Supply Figure 26.2 shows the effect of an increase in potential GDP. The LAS curve shifts rightward and the SAS curve shifts along with the LAS curve.
11 Aggregate Supply Changes in the Money Wage Rate Figure 26.3 shows the effect of a rise in the money wage rate. Short-run AS decreases and shifts leftward. Long-run aggregate supply does not change.
12 Aggregate Demand The quantity of real GDP demanded, Y, is the total amount of final goods and services produced in Canada that people, businesses, governments, and foreigners plan to buy. This quantity is the sum of consumption expenditures, C, investment, I, government expenditure, G, and net exports, X M. That is, Y = C + I + G + X M
13 Aggregate Demand Buying plans depend on many factors and some of the main ones are a) The price level b) Expectations c) Fiscal policy and monetary policy d) The world economy
14 Aggregate Demand The Aggregate Demand Curve Aggregate demand is the relationship between the quantity of real GDP demanded and the price level. The AD curve slopes downward for two reasons: Wealth effect Substitution effects
15 Aggregate Demand Wealth Effect A rise in the price level, other things remaining the same, decreases the quantity of real wealth (money, stocks, etc.). The quantity of real GDP demanded decreases. Similarly, a fall in the price level, other things remaining the same, increases the quantity of real wealth and increases the quantity of real GDP demanded increases.
16 Aggregate Demand Substitution Effects Intertemporal substitution effect: A rise in the price level, other things remaining the same, decreases the real value of money and raises the interest rate. When the interest rate rises, people borrow and spend less, so the quantity of real GDP demanded decreases. Similarly, a fall in the price level increases the real value of money and lowers the interest rate. When the interest rate falls, people borrow and spend more, so the quantity of real GDP demanded increases.
17 Aggregate Demand Changes in Aggregate Demand A change in any influence on buying plans other than the price level changes aggregate demand. The main influences on aggregate demand are Expectations Fiscal policy and monetary policy The world economy
18 Aggregate Demand Figure 26.5 illustrates changes in aggregate demand. When aggregate demand increases, the AD curve shifts rightward and when aggregate demand decreases, the AD curve shifts leftward.
19 Explaining Macroeconomic Trends and Fluctuations Short-Run Macroeconomic Equilibrium Short-run macroeconomic equilibrium occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the SAS curve.
20 Explaining Macroeconomic Fluctuations If real GDP is above equilibrium GDP, firms decrease production and lower prices and if real GDP is below equilibrium GDP, firms increase production and raise prices.
21 Explaining Macroeconomic Fluctuations These changes bring a movement along the SAS curve towards equilibrium. In short-run equilibrium, real GDP can be greater than or less than potential GDP.
22 Explaining Macroeconomic Trends and Fluctuations Long-Run Macroeconomic Equilibrium Long-run macroeconomic equilibrium occurs when real GDP equals potential GDP when the economy is on its LAS curve. Long-run equilibrium occurs at the intersection of the AD and LAS curves.
23 Explaining Macroeconomic Trends and Fluctuations Adjustment to long-run equilibrium. Initially, the economy is at below-full employment equilibrium. In the long run, the money wage falls until the SAS curve passes through the long-run equilibrium point.
24 Explaining Macroeconomic Trends and Fluctuations Initially, the economy is at an above-full employment equilibrium. In the long run, the money wage rises until the SAS curve passes through the long-run equilibrium point.
25 Explaining Macroeconomic Trends and Fluctuations Economic Growth in the AS-AD Model Because the quantity of labour grows, capital is accumulated, and technology advances, potential GDP increases. The LAS curve shifts rightward.
26 Explaining Macroeconomic Trends and Fluctuations Inflation? If the quantity of money grows faster than potential GDP, aggregate demand increases by more than long-run aggregate supply. The AD curve shifts rightward faster than the rightward shift of the LAS curve.
27 Explaining Macroeconomic Trends and Fluctuations The Business Cycle in the AS-AD Model The business cycle occurs because aggregate demand and the short-run aggregate supply fluctuate, but the money wage does not change rapidly enough to keep real GDP at potential GDP. An above full-employment equilibrium is an equilibrium in which real GDP exceeds potential GDP. A full-employment equilibrium is an equilibrium in which real GDP equals potential GDP. A below full-employment equilibrium is an equilibrium in which potential GDP exceeds real GDP.
28 Explaining Macroeconomic Trends and Fluctuations Figures 26.9(a) and (d) illustrate above fullemployment equilibrium. The amount by which potential GDP exceeds real GDP is called a inflationary gap. Figures 26.9(b) and (d) illustrate full-employment equilibrium.
29 Explaining Macroeconomic Trends and Fluctuations Figures 26.9(c) and (d) illustrate below fullemployment equilibrium. When real GDP is less than potential GDP, the gap is called a recessionary gap. Figure 26.9(d) shows how, as the economy moves from one type of short-run equilibrium to another, real GDP fluctuates around potential GDP in a business cycle.
30 Explaining Macroeconomic Trends and Fluctuations Fluctuations in Aggregate Demand An increase in aggregate demand shifts the AD curve rightward. Firms increase production and the price level rises in the short run.
31 Explaining Macroeconomic Trends and Fluctuations At the short-run equilibrium, there is an inflationary gap. The money wage rate begins to rise and the SAS curve starts to shift leftward. The price level continues to rise and real GDP continues to decrease until it equals potential GDP.
32 Explaining Macroeconomic Trends and Fluctuations Fluctuations in Aggregate Supply Effects of a rise in the price of oil. The SAS curve shifts leftward. Real GDP decreases and the price level rises. The economy experiences stagflation.
33 Macroeconomic Schools of Thought Macroeconomists can be divided into three broad schools of thought: Classical Keynesian Monetarist
34 Macroeconomic Schools of Thought The Classical View A classical macroeconomist believes that the economy is self-regulating and always at full employment. The term classical derives from the name of the founding school of economics that includes Adam Smith, David Ricardo, and John Stuart Mill. A new classical view is that business cycle fluctuations are the efficient responses of a well-functioning market economy that is bombarded by shocks that arise from the uneven pace of technological change.
35 Macroeconomic Schools of Thought The Keynesian View A Keynesian macroeconomist believes that left alone, the economy would rarely operate at full employment and that to achieve and maintain full employment, active help from fiscal policy and monetary policy is required. The term Keynesian derives from the name of one of the twentieth century s most famous economists, John Maynard Keynes. A new Keynesian view holds that not only is the money wage rate sticky but also are the prices of goods sticky.
36 Macroeconomic Schools of Thought The Monetarist View A monetarist is a macroeconomist who believes that the economy is self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady. The term monetarist was coined by an outstanding twentieth-century economist, Karl Brunner, to describe his own views and those of Milton Friedman.
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
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 ),
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
Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky Name Time: 2 hours Marks: 80 Multiple choice questions 1 mark each and a choice of 2 out of 3 short answer question
Chapter 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* The Demand for Topic: Influences on Holding 1) The quantity of money that people choose to hold depends on which of the following? I. The price
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
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
Chapter 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Key Concepts The Demand for Money Four factors influence the demand for money: The price level An increase in the price level increases the nominal
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
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
ECON 3312 Macroeconomics Exam 3 Fall 2014 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Everything else held constant, an increase in net
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
THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL. Introduction. This model represents the workings of the economy as the interaction between two curves: - The AD curve, showing the relationship between
Chapter 3 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded.
1.The aggregate demand curve shows the relationship between inflation and: A) the nominal interest rate. D) the exchange rate. B) the real interest rate. E) short-run equilibrium output. C) the unemployment
CONCEPT OF MACROECONOMICS Macroeconomics is the branch of economics that studies economic aggregates (grand totals):e.g. the overall level of prices, output and employment in the economy. If you want to
Pre-Test Chapter 10 ed17 Multiple Choice Questions 1. Refer to the above diagrams. Assuming a constant price level, an increase in aggregate expenditures from AE 1 to AE 2 would: A. move the economy from
Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)
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
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
quilibrium in Aggregate conomy quilibrium in the Aggregate conomy Changes in the SAS, AD, and curves affect short-run and long-run equilibrium. Short-Run quilibrium Short-run equilibrium is where the AS
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
4 Macroeconomics LESSON 6 Interest Rates and Monetary Policy in the Short Run and the Long Run Introduction and Description This lesson explores the relationship between the nominal interest rate and the
Effects of Inflation Unanticipated Inflation in the Labor Market Unanticipated inflation has two main consequences in the labor market: Redistribution of income Departure from full employment Effects of
EC2105, Professor Laury EXAM 2, FORM A (3/13/02) Print Your Name: ID Number: Multiple Choice (32 questions, 2.5 points each; 80 points total). Clearly indicate (by circling) the ONE BEST response to each
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
Government Budget and Fiscal Policy 11 CHAPTER The National Budget The national budget is the annual statement of the government s expenditures and tax revenues. Fiscal policy is the use of the federal
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
The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital
University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi Chapter 29 Fiscal Policy 1) If revenues exceed outlays, the government's budget balance
LECTURE NOTES ON MACROECONOMIC PRINCIPLES Peter Ireland Department of Economics Boston College firstname.lastname@example.org http://www2.bc.edu/peter-ireland/ec132.html Copyright (c) 2013 by Peter Ireland. Redistribution
The Short-Run Macro Model In the short run, spending depends on income, and income depends on spending. The Short-Run Macro Model Short-Run Macro Model A macroeconomic model that explains how changes in
Chapter 13 1. According to the sticky-price model: A) all firms announce their prices in advance. B) all firms set their prices in accord with observed prices and output. C) some firms set their prices
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
Economics 202 Principles Of Macroeconomics Professor Yamin Ahmad The Federal Reserve System The Federal Reserve System, or the Fed, is the central bank of the United States. Supplemental Notes to Monetary
Practiced Questions Chapter 20 1. The model of aggregate demand and aggregate supply a. is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution
Economics 101 Multiple Choice Questions for Final Examination Miller PLEASE DO NOT WRITE ON THIS EXAMINATION FORM. 1. Which of the following statements is correct? a. Real GDP is the total market value
1 Objectives for Chapter 9 Aggregate Demand and Aggregate Supply At the end of Chapter 9, you will be able to answer the following: 1. Explain what is meant by aggregate demand? 2. Name the four categories
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
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)
Name: Solutions Cosumnes River College Principles of Macroeconomics Problem Set 11 Will Not Be Collected Fall 2015 Prof. Dowell Instructions: This problem set will not be collected. You should still work
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
Survey of Macroeconomics, MBA 641 Fall 2006, Quiz 4 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The central bank for the United States
Lesson 8 - Aggregate Demand and Aggregate Supply Acknowledgement: Ed Sexton and Kerry Webb were the primary authors of the material contained in this lesson. Section 1: Aggregate Demand The second macroeconomic
Answers to Text Questions and Problems in Chapter 8 Answers to Review Questions 1. The key assumption is that, in the short run, firms meet demand at pre-set prices. The fact that firms produce to meet
CHAPTER 14 BALANCE-OF-PAYMENTS ADJUSTMENTS UNDER FIXED EXCHANGE RATES MULTIPLE-CHOICE QUESTIONS 1. Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium?
University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 27 Expenditure Multipliers 1) Disposable income is A) aggregate income minus transfer
THE ECONOMY AT 29 FULL EMPLOYMENT CHAPTER Objectives After studying this chapter, you will able to Describe the relationship between the quantity of labour employed and real GDP Explain what determines
Study Questions 5 (Money) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The functions of money are 1) A) medium of exchange, unit of account,
Macroeconomics Series 2: Money Demand, Money Supply and Quantity Theory of Money by Dr. Charles Kwong School of Arts and Social Sciences The Open University of Hong Kong 1 Lecture Outline 2. Determination
Economics 101 Quiz #1 Fall 2002 1. Assume that there are two goods, A and B. In 1996, Americans produced 20 units of A at a price of $10 and 40 units of B at a price of $50. In 2002, Americans produced
The Fiscal Policy and The Monetary Policy Ing. Mansoor Maitah Ph.D. Government in the Economy The Government and Fiscal Policy Fiscal Policy changes in taxes and spending that affect the level of GDP to
3 Macroeconomics LESSON 8 Fiscal Policy Introduction and Description Fiscal policy is one of the two demand management policies available to policy makers. Government expenditures and the level and type
Labor Market and Unemployment Ing. Mansoor Maitah Ph.D. Product and Factor Markets Demand for Goods and Services Market of Goods and Services S D Supply of Goods and Services Households Firms Supply of
Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services
2.5 Monetary policy: Interest rates Learning Outcomes Describe the role of central banks as regulators of commercial banks and bankers to governments. Explain that central banks are usually made responsible
Fiscal Policy chapter: 28 13 ECONOMICS MACROECONOMICS 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to
AP Macroeconomics 2003 Scoring Guidelines Form B The materials included in these files are intended for use by AP teachers for course and exam preparation; permission for any other use must be sought from
Aggregate Demand, Aggregate Supply, and the Self-Correcting Economy The Role of Aggregate Demand & Supply Endogenizing the Price Level Inflation Deflation Price Stability The Aggregate Demand Curve Relates
Facts about the business cycle Chapter 9: GD growth averages 3 3.5 percent per year over the long run with large fluctuations in the short run. Consumption and investment fluctuate with GD, but consumption
2 0 0 0 E D I T I O N CLEP O F F I C I A L S T U D Y G U I D E College Level Examination Program The College Board Principles of Macroeconomics Description of the Examination The Subject Examination in
Major Currents in Contemporary Economics The Real Business Cycle School Mariusz Próchniak Department of Economics II Warsaw School of Economics 1 Background During 1972-82,the dominant new classical theory
Fill in the Blanks. Module 1 S.Y.B.COM. (SEM-III) ECONOMICS 1. The continuous flow of money and goods and services between firms and households is called the Circular Flow. 2. Saving constitute a leakage
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.
University of California-Davis Economics 1B-Intro to Macro Handout 8 TA: Jason Lee Email: email@example.com I. Introduction to Aggregate Demand/Aggregate Supply Model In this chapter we develop a model
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
KrugmanMacro_SM_Ch14.qxp 10/27/05 3:25 PM Page 165 Monetary Policy 1. Go to the FOMC page of the Federal Reserve Board s website (http://www. federalreserve.gov/fomc/) to find the statement issued after
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
Potential GDP and Economic Growth CHAPTER17 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Explain the forces that determine potential GDP and
1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: a) If investment does not depend on the interest rate, the IS curve
Chapter 7: Classical-Keynesian Controversy John Petroff The purpose of this topic is show two alternative views of the business cycle and the major problems of unemployment and inflation. The classical
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
CHAPTER 23 FISCAL POLICY: COPING WITH INFLATION AND UNEMPLOYMENT Chapter in a Nutshell To say that an economy is in equilibrium tells us very little about the general state of the economy. The model showing
Chapter 17 1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change
Pre-Test Chapter 11 ed17 Multiple Choice Questions 1. Built-in stability means that: A. an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby
7 The labour market, I: real wages, productivity and unemployment 7.1 INTRODUCTION Since the 1970s one of the major issues in macroeconomics has been the extent to which low output and high unemployment
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
CHAPTER 1 Chapter Outline Introduction to macroeconomics The long run and short run Economic models and the real world A first look at the AD-AS framework Unemployment and inflation Actual and potential
Study Questions 8 (Keynesian Model) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the Keynesian model of aggregate expenditure, real GDP is