Chapter 12-Macroeconomics- Aggregate Demand and Aggregate Supply

Aggregate Demand

Real GDP desired at each price level. Inverse Relationship: Real Balances Effect, Interest rate Effect, Foreign purchases effect

The Aggregate Demand Curve

Determinants of aggregate demand:

Shift factors affecting C, I, G, Xn

Two components involved:

1. Change in one of the determinants 2. Multiplier Effect

Changes in Aggregate Demand Graphed

Consumer Spending

Consumer Wealth, Household Borrowing, Consumer Expectations, Personal Taxes

Investment spending

Real Interest Rates, Expected Returns(Expectations about future business conditions, Technology, Changes in excess capacity, Business taxes)

Government Spending increases

Aggregate demand increases(as long as interest rates and tax rates do not change), More transportation projects

Government spending decreases

Aggregate demand decreases, less military spending

Net Export Spending

National Income Abroad, Exchange rates: Dollar depreciation, dollar appreciation

Aggregate Supply

Total real output produced at each price level, relationship depends on time horizon: Immediate short run, short run, long run

Aggregate Supply in the immediate Short run

The Aggregate Supply Curve(Short Run)

Aggregate Supply in the Long Run

Changes in Aggregate Supply Graphed

Determinants of aggregate supply:Shift Factors, Collectively position the AS curve, Changes raise or lower per-unit production costs

Input Prices

Domestic resource prices: Labor, Capital, Land

Prices of imported resources: Imported Oil, Exchange Rates

Productivity

Real output per unit of input, increase in productivity reduce costs, decrease in productivity increase costs

Productivity

total output/total inputs

Per-unit production cost

Total input cost/total output

Legal Changes alter per-unit costs of output

Business taxes and subsidies, government regulation

The equilibrium price level and Equilibrium Real GDP,

An increase in Aggregate Demand that causes Demand-Pull Inflation

A Recession Resulting from a Leftward Shift of Aggregate Demand When the Price Level is Downwardly Inflexible

Decreases in AD: Recession and Cyclical Unemployment

Prices are downwardly inflexible: Fear of price wards, menu costs, wage contracts, efficiency wages, minimum wage law

Deviation of Actual GDP from Potential GDP, expressed as a percentage of potential GDP, 2017

A Decrease in Aggregate Supply that Causes Cost-Push Inflation

Growth, Full-Employment, and Relative Price Stability

Part One: stimulus and the Great Recession

Housing collapse triggers bank failures which leads to recession, Federal Reserve intervenes: Lowers short-term interest rates, federal government begins largest peacetime program of spending.

Last word: stimulus and the Great Recession

GDP Growth has been disappointing, High debt load due to low interest rates, high rate of savings, unequal impact, price increases rather than output gains