Name Date Per Part 1: Aggregate Demand 1. Aggregate means. When we use aggregates, we combine. Aggregate Demand is all the goods and services ( ) that buyers are willing and able to purchase at different price levels. The Demand for by in the U.S. There is an relationship between and GDP. If price level (Inflation), then Real GDP demanded. If price level (deflation), the Real GDP demanded increases. 2. Graph 3. Why is AD Downward Sloping? a. Wealth Effect: higher price levels reduces the of money. This decreases the Q of. Lower price levels increase purchasing power and. SO.if PL goes, then GDP demanded goes. b. Interest Rate Effect- When the price level increases, lenders have to charge higher to get a REAL return on their. Higher interest rates. c. Foreign trade effect: When U.S. price level rises, foreign buyers and American buyers. fall and imports, causing GDP demanded to fall ( decreases) 4. Shifters of Aggregate Demand: a. Change in b. Change in c. Change in d. Change in 5. AD = 6. Graph: Part 2: MPC/MPS/Multipliers 1. Disposable Income is also known as your income, paycheck, or income. 2. Marginal Propensity to (MPC): the fraction of any change in disposable income that is. a. MPC = b. MPC = 3. Marginal Propensity to (MPS): the fraction of any change in disposable income that is.
a. MPS= b. MPS= 4. MPC + MPS = therefore MPC= 1- and MPS= 1-. People can only do two things with their disposable income,. 5. Spending Multiplier Effect: An initial change in spending ( ) causes a larger change in aggregate spending or Aggregate (AD) a. Multiplier= b. Multiplier = 6. Expenditures and flow continuously which sets off a spending increase in the economy. 7. You can calculate the Spending Multiplier from either the MPC or the MPS a. Multiplier= b. Multipliers are when there is an in spending and when there is a decrease. 8. Tax Multiplier: when the taxes, the multiplier works in. Why? Because money is leaving the. a. Tax Multiplier (note: its negative) = b. If there is a tax-cut, then the multiplier is because there is now more money in the circular flow 9. Examples: 10. IMPORTANT: When increases are matched with an equal sized increase in, that change ends up being = to the change in government spending. The balanced budget multiplier always = Part 3: Aggregate Supply 1. Aggregate Supply is the amount of goods and services (Real GDP). The supply of. Aggregate supply differentiates between and has 2 different curves. Short Run Aggregate Supply (SRAS)-. Long Run Aggregate Supply (LRAS)- Wages and resource prices will as price levels. a. In the short run, wages and resource prices will increase as price levels increase, but with, the firm has the incentive to. 2. Short Run Graph 3. Long Run Graph- if profit doesn t change, firm has no incentive to.
4. Shifters of Aggregate Supply (R.A.P) a. Resources Prices i. Price of domestic and imported resourcesii. Supply shocksiii. Inflationary expectationsiv. If producers expect higher prices in the future, workers will demand and costs will increase. This will AS b. Actions of the Government (NOT Government Spending) i. Taxes on producers ii. Subsidies iii. Government Regulations c. Productivity i. Technology- 5. Graph of Shifts Part 4: Putting AD and AD together to get Equilibrium Basic Graph Practice: 1 2 3 4 5 6 7 8 9 10 Situation AD or AS Shifter Inc or Decreas Graphs of Shifts: For each draw the shift and write what happens to PL and Output. Arrows are fine!
#1 Increase in Consumer Spending #2 Government Increases Spending Inflationary Gap Consumer Spending Falls Recessionary Gap Negative Supply Show of Oil If consumer spending increases what will happen in the If consumer spending increases what will happen in the If consumer spending decreases what will happen in the Assume there is an increase in government spending. What happens in the short run Consumer Expectations fall and consumer spending plummets. What happens in the long run? If investment increases, what happens in the short run and long-run
Part 5: Classical v. Keynesian Economics 1. Classical Theory- A change in AD will not change because prices are flexible. AS is vertical so AD can t increase without causing. a. Graph 1: b. Graph 2: 2. Keynesian Theory- A decrease in AD will lead to a because prices of resources (wages) are NOT _-. An increase in AD during a recession doesn t cause inflation. a. Graph 1: b. Graph 2: 3. 3 Ranges of Aggregate Supply a. Keynesian Rangeb. Intermediate Rangec. Classical Range