Chpt 10: Dynamic Change, Economic Fluctuations, and the AD–AS Model

Rightward shift

Occurs when factors lead to an increase in Aggregate Demand (AD).

Leftward shift

Occurs when factors lead to a decrease in Aggregate Demand (AD).

Changes in foreigners income

Foreign country has higher income → Spend more on imports → Domestic country exports more → Rightwards shift in domestic AD.

GDP (AD) ↑

Consumption + Investment + Govt. spending + Net exports↑ (Exports↑ - Imports).

Changes in foreigners income (decrease)

Foreign country has lower income → Spend less on imports → Domestic country exports less → Leftwards shift in domestic AD.

Changes in real wealth

Real wealth are assets individuals hold such as cash, property, human & physical capital, stocks & bonds, and goods.

Real wealth increases

Individuals spend more → Rightward shift AD.

Real wealth decreases

Individuals spend less → Leftward shift AD.

Expectations about the economy

Specifically whether you think the economy will perform better or worse in the future.

Graph of disposable income

As UK disposable income increases, US exports to the UK increase → Rightward shift AD for US.

Graph of personal consumption

As Real personal consumption increases, Real GDP per capita increases → Rightward shift AD.

Graph of personal consumption (decrease)

As Real personal consumption decreases, Real GDP per capita decreases → Leftward shift AD.

Real interest rate

An economic factor that can influence shifts in Aggregate Demand.

Exchange rate

An economic factor that can influence shifts in Aggregate Demand.

Expected inflation

An economic factor that can influence shifts in Aggregate Demand.

Foreigners income (increase)

A richer foreign country can buy more goods from abroad, raising other countries' GDP.

Poorer countries

They can't afford to buy a lot of things from abroad, leading to a leftward shift in domestic AD.

Consumption

One of the components of GDP that can shift Aggregate Demand.

Investment

One of the components of GDP that can shift Aggregate Demand.

Govt. spending

One of the components of GDP that can shift Aggregate Demand.

Net exports

One of the components of GDP that can shift Aggregate Demand.

Optimistic

Spend more & save less → Rightwards shift AD

Pessimistic

Spend less & save more → Leftwards shift AD

Changes in expectations about the economy

If consumers' expectations about the economy are optimistic, Real GDP per capita increases → Rightward shift AD

Euro zone

An average of all 19 countries in the EU that uses Euro currency

Changes in expected inflation

Expect deflation → Spend less today → Leftwards shift AD

Changes in real interest rate (RIR)

If the real interest rate increases → less borrowing → Lower spending → Leftward shift AD

Borrowing money for consumption/investment

More expensive for consumers to take out loans for a car, a house, or education

Higher return on saving money

More people choose to save money rather than spend it

Real Interest Rate (RIR)

Changes in real interest rate affect AD specifically by using the loanable funds market graphs.

Decrease in Real Interest Rate

If the real interest rate decreases, it leads to less borrowing, lower spending, and a rightward shift in AD.

Increase in Real Interest Rate

If the real interest rate increases, it leads to less borrowing, lower spending, and a leftward shift in AD.

Exchange Rate Depreciation

Domestic currency depreciation makes domestic goods and services cheaper for foreigners, leading to an increase in exports and a rightward shift in domestic AD.

Exchange Rate Appreciation

Domestic currency appreciation makes domestic goods and services more expensive for foreigners, leading to a decrease in exports and a leftward shift in domestic AD.

Wealth Effect

Changes in wealth can lead to a rightward or leftward shift in AD.

Economic Expectations

Changes in economic expectations can lead to a rightward or leftward shift in AD.

Inflation Expectations

Changes in inflation expectations can lead to a rightward or leftward shift in AD.

Foreigners' Income

Changes in foreigners' income can lead to a rightward or leftward shift in AD.

Supply Shocks

Supply shocks are unexpected events that temporarily increase or decrease aggregate supply.

Resource Prices

Changes in resource prices can lead to a leftward or rightward shift in SRAS.

Expected Rate of Inflation

Expecting higher future prices leads to a leftward shift in SRAS, while expecting lower future prices leads to a rightward shift.

Input Costs

Increased input costs lead to a leftward shift in SRAS, while decreased input costs lead to a rightward shift.

Current Output

Current output can be affected by changes in expected future prices, leading to shifts in SRAS.

Price of Resources

The price of resources, such as rent for office space, wages, and loan repayments, affects SRAS shifts.

Rightward Shift in AD

Occurs when borrowing increases due to lower real interest rates or favorable exchange rates.

Leftward Shift in AD

Occurs when borrowing decreases due to higher real interest rates or unfavorable exchange rates.

Rightward Shift in SRAS

Occurs when resource prices decrease or when lower inflation expectations are present.

Leftward Shift in SRAS

Occurs when resource prices increase or when higher inflation expectations are present.

Loanable Funds Market

A market that illustrates the relationship between interest rates and the supply and demand for loans.

Aggregate Demand (AD)

The total demand for goods and services within an economy at a given overall price level and in a given time period.

Short-Run Aggregate Supply (SRAS)

The total supply of goods and services that firms are willing and able to produce at a given price level in the short run.

SRAS

Short-Run Aggregate Supply, which shifts leftward with increases and rightward with decreases.

Changes in resource prices

In the short-run, firms rely on workers to change output as they cannot build new factories.

Cost of workers

If the cost of workers increases, output per worker decreases, leading to a leftward shift in SRAS.

Negative supply shock

Includes embargoes, war, and bad weather, leading to a leftward shift in SRAS.

Positive supply shock

Includes increased access to trade and good weather, leading to a rightward shift in SRAS.

Natural rate of unemployment

A decrease in the natural rate of unemployment leads to an increased LRAS (rightward shift).

Resource base

Represents the total amount of resources available in the economy.

Technology

Represents the level of technological development affecting productivity.

Institutional arrangements

Public policy that affects productivity and the use of resources.

Discovering new resources

Leads to an increase in LRAS.

Restricting resources

Leads to a decrease in LRAS.

Technically recoverable resources

Estimated at 29.4 billion barrels of oil and 391.6 trillion cubic feet of gas.

Gas supply duration

Enough gas to power US electricity for 29 years or supply global natural gas consumption for 2.5 years.

Oil supply duration

Enough oil to fuel US oil consumption for roughly 4 years or global oil consumption for 278 days.

Increasing human capital & technology

Leads to an increase in LRAS.

Restricting human capital & technology

Leads to a decrease in LRAS.

Short-run vs. long-run equilibrium

In the short-run, prices matter and can incentivize changes in supply; in the long-run, all prices lead to the same output level.

Factors that shift LRAS

Includes changes in productivity, resource prices, expected rate of inflation, and supply shocks.

Long-term capability to produce

Only factors affecting long-term productivity shift LRAS.

Fixing the economy

Only the curve that didn't cause the problem (AD or SRAS) can fix the economy; LRAS cannot be changed quickly.