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Graphing Macroeconomic Problems

Graphing Macroeconomic Problems. Full Employment (F.E.) – There is between 5% and 5.5% unemployment in the economy There is 0% cyclical unemployment. P AS AD= C+I+G+NX ☺ F.E. RGDP.

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Graphing Macroeconomic Problems

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  1. Graphing MacroeconomicProblems

  2. Full Employment (F.E.) – There is between 5% and 5.5% unemployment in the economyThere is 0% cyclical unemployment

  3. P AS AD= C+I+G+NX ☺ F.E. RGDP

  4. There are 3 macroeconomic ProblemsI. The Recessionary Gap- caused by a leftward shift in the AD curve (AD is too low)

  5. AD shifts leftward when either C, I, G, or NX decreaseex: Consumer confidence falls causing C to fall

  6. P AS AD= C+I+G+NX AD’ RGDPC F.E. RGDPRec. GAP

  7. Three things to note from the Recessionary Gap:1. RGDP is lower than it would be at F.E.2. Unemployment is higher than it would be at F.E.

  8. 3. The average price level is lower than normal (inflation is not a problem)

  9. II. The Inflationary Gap - caused by a rightward shift in the AD curve (AD is too high)

  10. AD shifts rightward when either C, I, G, or NX increaseex: The government increases military expenditures causing G to increase

  11. P AS AD’ AD= C+I+G+NXF.E.RGDPC RGDPInfl. GAP

  12. Three things to note from the Inflationary Gap:1. RGDP is higher than it would be at F.E.2. Unemployment is lower than it would be at F.E.

  13. 3. The average price level is higher than at F.E. (Inflation is getting out of control)

  14. III. Stagflation- caused by a leftward shift in the AS curve

  15. AS shifts leftward when the cost of production increasesex: the price of oil, a major input increases

  16. P AS’ ASAD=C+I+G+NX RGDPC F.E.RGDP

  17. Three things to note from Stagflation:1. RGDP is lower than it would be at F.E.2. Unemployment is higher than it would be at F.E.

  18. 3. The average price level is higher than at F.E. (Inflation is getting out of control)

  19. During the Oil Crisis of the late 1970’s and early 1980’s both the inflation rate and the unemployment rate exceeded 10%Misery Index: The inflation rate + the unemployment rate

  20. If the AS curve shifts to the right, no problem is created.RGDP increases, while neither unemployment nor inflation increase.F.E. increases due to economic growth

  21. P AS AS’AD=C+I+G+NX F.E. F.E.’RGDP

  22. If the government takes no action, the economy will naturally, over time, return to F.E. (the long run equilibrium point in the economy)

  23. If the economy is experiencing high unemployment (rec. gap or stagflation) then there is a surplus of workers on the market

  24. This surplus causes the price of workers (real wages) to fallThat is, workers’ salaries don’t keep up with inflation

  25. Lower wages reduce the cost of production which in turn shifts the AS curve rightward bringing the economy back to F.E.

  26. P AS AS’ AD= C+I+G+NX AD’ RGDPC F.E. RGDPRec. GAP

  27. If the economy is experiencing a shortage of workers (Inflationary Gap) then real wages will be bid upwards

  28. This causes the cost of production to increase and the AS curve to shift leftward bringing the economy back to F.E.

  29. P AS’ AS AD’ AD= C+I+G+NX F.E.RGDPC RGDPInfl. GAP

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