Putting AD and AS together to get Equilibrium Price Level and Output. Unit 3: Aggregate Demand and Supply and Fiscal Policy

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1 1 Unit 3: Aggregate Demand and Supply and Fiscal Policy 1 Shifters of Aggregate Demand = C + I + G + X Change in Consumer Spending Change in Investment Spending Change in Government Spending Net EXport Spending Shifters of Aggregate Supply = R + A + P Change in Resource s Change in Actions of the Government Change in Productivity 2 Putting and together to get Equilibrium and Output 3

2 2 Use the and model to show an economy at full employment output LR 4 #1. Assume there is an increase in consumer spending. What happens to PL and output in the short- run? LR PL and Q will Increase 5 Practice or Shifter Increase or Decrease 6

3 3 Practice 1. An increase in consumer spending 2. The impact on net exports when a trading partner has a recession 3. A significant increase in the price of oil that affects the resource costs of businesses 4. Government increases spending but not taxes 5. Increase in wages that businesses pay workers 6. Effect on businesses when they expect inflation 7. Effect on investment when interest rates decrease 8. An increase in productivity 9. The impact on next exports when the country s currency depreciates 10. Government increases corporate taxes 7 Practice or Shifter Increase or Decrease 1 C Increase 2 X Decrease 3 R Decrease 4 G Increase 5 R Decrease 6 R Decrease 7 I Increase 8 P Increase 9 X Increase 10 A Decrease 8 Inflationary and Recessionary Gaps 9

4 4 The economy can only be in one of three places at any time Capital Goods Max Capacity 0% Unemployment Consumer Goods Full Employment 5% Unemployment Time Recessionary Gap Full Employment Inflationary Gap 10 Example: Assume the government increases spending. What happens to PL and Output? LR PL and Q will Increase 11 Inflationary Gap Output is high and unemployment is less than NRU LR Actual above potential 12

5 5 Example: Assume consumer spending falls. What happens to PL and Output? LR PL and Q will decrease 13 Recessionary Gap Output low and unemployment is more than NRU LR Actual below potential 14 Example: If there is a negative supply shock of oil. What happens to PL and Output? LR 1 Stagflation Stagnate Economy + Inflation Still considered recessionary gap 15

6 Audit Exam 2008 Audit Exam

7 Audit Exam 2012 Exam and Practice Worksheet 21

8 8 What Happens In the Long-Run? 22 If consumer spending increases, what will happen in the short-run and in the long-run? In the long-run, wages and costs increase LR 1 PL 2 Time 23 If consumer spending increases, what will happen in the short-run and in the long-run? In the long-run, wages and costs increase LR 1 Time 24

9 9 If consumer spending decreases, what will happen in the short-run and in the long-run? In the long-run, wages & costs eventually decrease LR PL Time 25 Practice 26 #1. Assume there is an increase in government spending. What happens to PL and output in the short- run? LR PL and Q will Increase 27

10 10 #2. Consumer expectations fall and consumer spending plummets. What happens to price level and output in the long-run? LR 1 PL 2 decreases and output stay s the same 28 #3. If consumer spending increases, what happens to price level and output in the long-run? PL 2 LR 1 level increases and output stays the same Audit Exam

11 11 Economic Growth 31 If investment increases, what happens in the short-run and long-run? Capital Stock- Machinery and tools purchased by businesses that increase their output LR LR 1 1 Capital Goods The PPC shifts outward since producers can make more 1 Consumer Goods 32 An increase in consumption or government spending doesn t cause economic growth. Only Investment causes growth since firms increase their capital stock LR 1 1 Capital Goods 1 Consumer Goods 33

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