Chapter 13 Aggregate Demand, Aggregate Supply, Equilibrium, and Inflation Kazu Matsuda BIZ 203 Macroeconomics
THE AGGREGATE DEMAND CURVE? = The total demand for goods and services in the economy.
DERIVING THE AGGREGATE DEMAND CURVE FIGURE 13.1 The Impact of an Increase in the Price Level on the Economy Assuming No Changes in G, T, and M s
DERIVING THE AGGREGATE DEMAND CURVE FIGURE 13.2 The Aggregate Demand (AD) curve Aggregate demand curve (AD) = A curve that shows the negative relationship between aggregate output (income) and the price level. Each point on the AD curve is a point at which both the goods market and the money market are in equilibrium.
THE AGGREGATE DEMAND CURVE: A WARNING The AD curve is not the sum of all the market demand curves in the economy. It is not a market demand curve.
SHIFTS OF THE AGGREGATE DEMAND If the quantity of money is An increase in government expanded at any given price level, purchases or a decrease in net taxes FIGURE 13.3 The Impact of an Increase in the Money Supply on the AD Curve FIGURE 13.4 The Effect of an Increase in Government Purchases or a Decrease in Net Taxes on the AD Curve
SHIFTS OF THE AGGREGATE DEMAND Expansionary monetary policy Expansionary fiscal policy Contractionary monetary policy Contractionary fiscal policy
THE AGGREGATE SUPPLY CURVE? = The total supply of all goods and services in an economy. THE AGGREGATE SUPPLY CURVE: A WARNING Aggregate supply (AS( AS) ) curve = A graph that shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level.
AGGREGATE SUPPLY IN THE SHORT RUN [1] Logic 1 An increase in aggregate demand when the economy is operating at low levels of output is likely to result in?. FIGURE 13.6 The Short-Run Aggregate Supply Curve When the economy is producing at its maximum level of output that is,? the aggregate supply curve becomes vertical.
AGGREGATE SUPPLY IN THE SHORT RUN [2] Logic 2 = The Response of Input Prices to Changes in the Overall Price Level If input prices changed at exactly the same rate as output prices, the AS curve would be?. Input prices particularly wage rates tend to lag behind increases in output prices for a variety of reasons.
SHIFTS OF THE AGGREGATE SUPPLY CURVE Costs Public policy
THE EQUILIBRIUM PRICE LEVEL The price level at which the aggregate demand and aggregate supply curves intersect. FIGURE 13.9 The Equilibrium Price Level
THE LONG-RUN AGGREGATE SUPPLY CURVE Potential output, or potential GDP = The level of aggregate output that can be sustained in the long run without inflation. Many economists believe costs lag behind price-level changes in the? but ultimately move with the overall price level. Wage rates tend to move very closely with the price level over time. If the price level increases at a steady rate, inflation come to be? and built into most labor contracts. If wage rates and other costs fully adjust to changes in prices in the long run, then the long-run AS curve is?.
Long-run aggregate supply curve
What is full-employment level?
Shift from Short-Run to Long-Run Equilibrium 1
Shift from Short-Run to Long-Run Equilibrium 1 FIGURE 13.9 The Long-Run Aggregate Supply Curve
Shift from Short-Run to Long-Run Equilibrium 2
Response to supply shock
Response to demand shock
AGGREGATE DEMAND, AGGREGATE SUPPLY, AND MONETARY AND FISCAL POLICY FIGURE 13.11 A Shift of the Aggregate Demand Curve When the Economy Is on the Nearly Flat Part of the AS Curve FIGURE 13.12 A Shift of the Aggregate Demand Curve When the Economy Is Operating at or Near Maximum Capacity
LONG-RUN AGGREGATE SUPPLY AND POLICY EFFECTS If the AS curve is vertical in the long run,?
CAUSES OF INFLATION? = An increase in the overall price level.? = Occurs when the overall price level continues to rise over some fairly long period of time. Inflation is always everywhere a.
? = Inflation that is initiated by an increase in aggregate demand. Link Dollar, Link G, FCX
? = Inflation caused by an increase in costs.
TABLE 7.6 Inflation Rates, 1974 1976 and 1980 1983 RECESSION BEGINS INFLATION RATE Source: See Table 17.8. 1974 11.0 1975 9.1 1976 5.8 1980 13.5 1981 10.3 1982 6.2 1983 3.2
MONEY AND INFLATION Sustained inflation as a purely monetary phenomenon.
Wage-price Adjustment Keynesian Monetarist supply-side Recession deficit Govn t Price