1 / 60

Principles and Policies I: Macroeconomics

Principles and Policies I: Macroeconomics. Chapter 9:Aggregate Demand, Aggregate Supply, and Modern Macroeconomics. Chapter 9 Learning Objectives You should be able to …. Discuss the historical development of macroeconomics.

nickan
Télécharger la présentation

Principles and Policies I: Macroeconomics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Principles and Policies I: Macroeconomics Chapter 9:Aggregate Demand, Aggregate Supply, and Modern Macroeconomics Macroeconomics, Maclachlan 10/13/04

  2. Chapter 9 Learning ObjectivesYou should be able to … • Discuss the historical development of macroeconomics. • Explain the shape of the aggregate demand curve and what factors shift the curve. • Explain the shape of the short run aggregate supply curve and what factors shift the curve. • Explain the shape of the long-run aggregate supply curve. • Show the effects of shifts of the aggregate demand and aggregate supply curves on price level and output in both the short run and long run. • Discuss the limitations of the macro policy model. Macroeconomics, Maclachlan 10/13/04

  3. Classical Model Equilibrium in each market leads to equilibrium in the economy as a whole. Fallacy of composition. Macroeconomics, Maclachlan 10/13/04

  4. Considering the whole as more than sum of the parts. First major macroeconomist: John Maynard Keynes The General Theory of Employment, Interest and Money (1936) Macroeconomics, Maclachlan 10/13/04

  5. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.--John Maynard Keynes Macroeconomics, Maclachlan 10/13/04

  6. The Paradox of Thrift • This paradox of thrift is important to the Keynesian story. • Paradox of thrift – an increase in savings can lead to a decrease in expenditures, decreasing output and causing a recession. Macroeconomics, Maclachlan 10/13/04

  7. The Aggregate Demand Curve • The aggregate demand (AD) curve shows how a change in the price level changes aggregate expenditures on all goods and services in an economy. • It shows the level of expenditures that would take place at every price level in the economy. Macroeconomics, Maclachlan 10/13/04

  8. The Slope of the AD Curve • The AD is a downward sloping curve. • Aggregate demand is composed of the sum of aggregate expenditures. Expenditures = C + I + G +(X - M) Macroeconomics, Maclachlan 10/13/04

  9. The Slope of the AD Curve • The slope of the AD curve is determined by the wealth effect, the interest rate effect, the international effect, and the multiplier effect. Macroeconomics, Maclachlan 10/13/04

  10. The Wealth Effect • Wealth effect – a fall in the price level will make the holders of money and other financial assets richer, so they buy more. • Most economists accept the logic of the wealth effect, however, they do not see the effect as strong. Macroeconomics, Maclachlan 10/13/04

  11. The Interest Rate Effect • Interest rate effect – the effect a lower price level has on investment expenditures through the effect that a change in the price level has on interest rates. Macroeconomics, Maclachlan 10/13/04

  12. The Interest Rate Effect • The interest rate effect works as follows: a decrease in the price level  increase of real cash  banks have more money to lend  interest rates fall  investment expenditures increase Macroeconomics, Maclachlan 10/13/04

  13. The International Effect • Internationaleffect – as the price level falls (assuming exchange rates do not change), net exports will rise. Macroeconomics, Maclachlan 10/13/04

  14. The International Effect • The international effect works as follows: a decrease in the price level in the U.S. the fall in price of U.S. goods relative to foreign goods  U.S. goods become more competitive internationally  U.S. exports rise and U.S. imports fall Macroeconomics, Maclachlan 10/13/04

  15. The Multiplier Effect • Initial changes in expenditures set in motion a process in the economy that amplifies the initial effects. • Multiplier effect – the amplification of initial changes in expenditures. Macroeconomics, Maclachlan 10/13/04

  16. Price level Wealth, interest rate, and international effects P0 Multiplier effect P1 Aggregate demand Y0 Y1 Ye Real output The AD Curve Macroeconomics, Maclachlan 10/13/04

  17. Shifts in the AD Curve • Except for a change in the price level, anything that changes aggregate expenditures shifts the AD curve. Macroeconomics, Maclachlan 10/13/04

  18. Shifts in the AD Curve • The main shift factors of aggregate demand are: • Foreign income. • Expectations about future output or prices. • Exchange rate fluctuations. • The distribution of income. • Government policies. Macroeconomics, Maclachlan 10/13/04

  19. Fiscal Policy • Changing tax rates and/or government spending to influence aggregate demand. • Expansionary macro policy shifts the curve to the right. • Contractionary macro policy shifts it to the left. Macroeconomics, Maclachlan 10/13/04

  20. Price level Initial effect Multiplier effect 100 200 P0 Change in total expenditures AD0 AD1 300 Real output Effect of a Shift Factor on the AD Curve Initial effect Macroeconomics, Maclachlan 10/13/04

  21. The Short-Run Aggregate Supply Curve • The short-runaggregate supply (SAS) curve specifies how a shift in the aggregate demand curve affects the price level and real output in the short run, other things constant. Macroeconomics, Maclachlan 10/13/04

  22. Price level Real output The Short-Run Aggregate Supply Curve SAS Macroeconomics, Maclachlan 10/13/04

  23. The Slope of the SAS Curve • The SAS curve is upward-sloping. • The SAS curve reflects two different types of microeconomic markets in our economy. • Auctionmarkets – markets represented by the supply/demand model. • Posted-price markets – prices are set by the producers and change only infrequently. Macroeconomics, Maclachlan 10/13/04

  24. Shifts in the SAS Curve • The AS curve shifts when a shift factor changes – other things are not constant: • Changes in input prices. • Changes in expectations of inflation. • Productivity. • Excise and sales taxes. • Import prices. Macroeconomics, Maclachlan 10/13/04

  25. The Long-Run Aggregate Supply Curve • The LAS is vertical crossing output axis at POTENTIAL OUTPUT. • At potential output, a rise in the price level means that all prices, including input prices rise. Macroeconomics, Maclachlan 10/13/04

  26. The Long-Run Aggregate Supply Curve Long-run aggregate supply (LAS) Price level Real output Macroeconomics, Maclachlan 10/13/04

  27. Real output A Range for Potential Output and the LAS Curve LAS P C B SAS A Underutilized resources Overutilized resources Low-level potential output High-level potential output Macroeconomics, Maclachlan 10/13/04

  28. Shifts in the LAS Curve • The LAS curve will shift whenever there is a changes in: • Capital. • Available resources. • Growth-compatible institutions. • Technological development. • Entrepreneurship. Macroeconomics, Maclachlan 10/13/04

  29. Equilibrium in the Aggregate Economy • Changes in the SAS, AD, and LAS curves affect short-run and long-run equilibrium. Macroeconomics, Maclachlan 10/13/04

  30. Short-Run Equilibrium • Short-run equilibrium is where the AS and AD curves intersect. Macroeconomics, Maclachlan 10/13/04

  31. Price level Real output Short-Run Equilibrium:Shift in Aggregate Demand SAS P1 F P0 E AD1 AD0 Y0 Y1 Macroeconomics, Maclachlan 10/13/04

  32. Price level Real output Short-Run Equilibrium:Shift in Aggregate Supply SAS1 G P1 SAS0 E P0 AD Y1 Y0 Macroeconomics, Maclachlan 10/13/04

  33. Long-Run Equilibrium • Long-run equilibrium is where the AD and long-run aggregate supply curves intersect. • In the long run, output is fixed and the price level is variable. Macroeconomics, Maclachlan 10/13/04

  34. LAS Price level H P1 E P0 AD1 AD0 Y0 Real output Long-Run Equilibrium:Shift in Aggregate Demand Macroeconomics, Maclachlan 10/13/04

  35. Integrating the Short-Run and Long-Run Frameworks • The economy is in both short-run and long-run equilibrium when all three curves intersect in the same location. Macroeconomics, Maclachlan 10/13/04

  36. Integrating the Short-Run and Long-Run Frameworks • The ideal situation is for aggregate demand to grow at the same rate as aggregate supply and potential output. • Unemployment and growth are at their target rates with no inflation. Macroeconomics, Maclachlan 10/13/04

  37. LAS Price level SAS E P0 AD YP Real output Long-Run Equilibrium Macroeconomics, Maclachlan 10/13/04

  38. The Recessionary Gap • A recessionary gap is the amount by which equilibrium output is below potential output. Macroeconomics, Maclachlan 10/13/04

  39. The Recessionary Gap • If the economy remains at this level for a long time, there would be an excess supply of factors of production. • Costs and wages would tend to fall. Macroeconomics, Maclachlan 10/13/04

  40. The Recessionary Gap • As factor prices fall, the SAS curve will shift down to eliminate the recessionary gap. Macroeconomics, Maclachlan 10/13/04

  41. Price level Real output The Recessionary Gap LAS SAS0 A P0 B SAS1 P1 AD Recessionary gap Y1 YP Macroeconomics, Maclachlan 10/13/04

  42. The Inflationary Gap • The inflationarygap occurs when the economy is above potential that exists at the current price level. • Factor prices rise causing the SAS curve to shift up. • The price level rises, and the inflationary gap is eliminated. Macroeconomics, Maclachlan 10/13/04

  43. The Inflationary Gap LAS SAS2 D Price level P2 C SAS0 P0 AD Inflationary gap YP Y2 Real output Macroeconomics, Maclachlan 10/13/04 (c)

  44. The Economy Beyond Potential • When the economy operates below its potential, firms can hire additional factors of production without increasing production costs. • Once the economy reaches its potential output, that is no longer possible. Macroeconomics, Maclachlan 10/13/04

  45. The Economy Beyond Potential • As firms compete for resources, costs rise beyond productivity increases. • The short-run AS curve shifts up and the price level rises. Macroeconomics, Maclachlan 10/13/04

  46. The Economy Beyond Potential • The economy will slow down by itself or the government will step in with a policy to contract output and eliminate the inflationary gap. Macroeconomics, Maclachlan 10/13/04

  47. Price level Real output Expansionary Fiscal Policy LAS AS P1 P0 AD1 A AD0 Y0 YP Macroeconomics, Maclachlan 10/13/04

  48. Price level Real output Contractionary Fiscal Policy LAS B AS P2 AD0 AD2 YP Y2 Macroeconomics, Maclachlan 10/13/04

  49. Some Additional Policy Examples • Unemployment is 12 percent and there is no inflation. • What policy would you recommend? • Use expansionary fiscal policy to shift the AD curve out to its potential income. Macroeconomics, Maclachlan 10/13/04

  50. Price level Real output Expansionary Fiscal Policy LAS SAS B P1 P0 AD1 A AD0 Y0 YP Macroeconomics, Maclachlan 10/13/04

More Related