Recording-2025-02-10T21:54:00.063Z

Chapter Overview

• Chapter 8: Focus on the output (y).

• Chapter 9: Explore the differences between actual output (y) and potential output (y*), termed as the output gap.

• Chapter 10: Discuss strategies to increase potential output (y*).

Key Concepts

Chapter 9: Output Gap

• Output Gap: Difference between actual output (y) and potential output (y*).

  • If y < y*, this indicates a recessionary gap.

  • If y > y*, this indicates an inflationary gap.

• The goal is to eliminate the gap, referred to as becoming "gap busters".

Aggregate Demand and Supply Curves

1. Aggregate Expenditure (AE): Represents total spending in the economy; formula: AE = C + I + G + NX.

   • Consumption patterns change based on price levels, leading to movements along the AE line.

2. Derivation of Aggregate Demand Curve:

   • Starting from a 45-degree line where total expenditure equals GDP.

   • Changes in prices (e.g., an increase from $1 to $2) lead to adjustments in expenditure.

   • Higher prices lead to lower aggregate expenditure, representing a movement along the curve.

3. Equilibrium: Each point on the aggregate demand curve indicates an equilibrium level of GDP where AE meets GDP (Y).

   • Output is a function of price: If prices rise, consumption decreases, leading to a decrease in output to meet new expenditure levels.

Short Run Aggregate Supply (SRAS)

• The relationship between output (Y) and the price level (P).

• In the short run, as production increases, costs initially remain stable; costs rise eventually due to capacity limits.

• Profit Incentives: Higher production leads to a need to increase prices as costs rise.

Equilibrium Analysis

• The intersection of aggregate demand and supply curves indicates macroeconomic equilibrium.

  • The equilibrium GDP (y) is where the economy is producing at full capacity and does not want to change unless external factors influence it (e.g., fiscal or monetary policies).

Price Adjustments and Output Gaps

• Recessionary Gap:

  • Occurs when y < y*.

  • Indicators: High unemployment and excess supply of labor create downward pressure on wages.

  • Falling wages decrease costs for producers, leading to an increase in short-run aggregate supply (SRAS) and returning output to potential level (y*).

• Inflationary Gap:

  • Occurs when y > y*.

  • Indicators: Increased wages due to overtime, raising costs for production.

  • Rising costs decrease (shift left) SRAS until alignment with potential output (y*).

Long-Term Perspective (Chapter 10)

• Focus on how to push potential output (y*) to the right, facilitating economic growth.

• Engagement in monetary and fiscal policies can stimulate demand and shift the Aggregate Demand curve rightward.