Chapter 10: Aggregate Demand and Supply

Canada’s economy has been growing since the…

Industrial revolution

What average rate has Canada been growing for 100 yrs?

2%

What does long term economic growth measure?

Real GDP over time

Economic changes can be split into 2:

1. Long term GROWTH

2. Short term FLUCTUATIONS

What are economic fluctuations?

Recurring expansions and contractions in real GDP in the long term.

Fluctuations occur due to…

Changes in business conditions

Fluctuations are also known as…

Business cycles

What are the phases of the business cycle?

1. Recession

2. Trough

3. Expansion/recovery

4. Peak

How to measure business cycles?

• Peak to peak

• Trough to trough

Peak and trough are…

Turning points

Characteristics of business cycles

• Unpredictable/irregular

• Macroeconomic variables move together w/ real GDP

What do we want to focus on regarding change?

1. Direction of the change

2. Timing of the change

DIRECTIONS of change:

1. Procyclical

2. Countercyclical

3. Acyclical

Procyclical variable

High in recovery

Countercyclical variable

High in recession

Acyclical variable

Doesn’t change with business cycles

TIMING of change:

1. Leading

2. Lagging

3. Coincidence

Leading variable

Peak and trough happen before real GDP

Lagging variable

Peak and trough happen after real GDP

Coincidence variable

Neither!

What are the business cycle models?

• Aggregate demand

• Aggregate supply

What are the variables in the aggregate supply model?

• Qs (quantity supplied of real GDP)

• P (price level: CPI or GDP deflator)

What are the 2 kinds of aggregate supply?

1. LRAS (long run aggregate supply)

2. SRAS (short run aggregate supply)

LRAS is…

• Always vertical

• Real GDP = potential GDP

SRAS is…

• Positive relationship between Q and P

• When everything else is constant (only P changes)

Equilibrium when…

• LRAS = SRAS

• Potential GDP = Actual GDP

What causes a movement ALONG the supply curve?

Change in Qs (change in P)

What causes a SHIFT of the supply curve?

Change in supply factors

What are the supply factors?

• Potential GDP (LRAS, SRAS)

• Wage rate (SRAS)