Thuyết trình môn đầu tư tài chính aggregate demand and supply analysis

● The first building block of aggregate supply and demand analysis is the aggregate demand curve: describes the relationship between the quantity of aggregate output demanded and the in

2 Aggregate Supply and Shifts in Aggregate Supply Curves

3 Equilibrium in Aggregate Demand and Supply Analysis

4 Changes in Equilibrium: Aggregate Demand Shocks

5 Changes in Equilibrium: Aggregate Supply Shocks

6 AD/AS Analysis of Foreign Business Cycle Episodes

7 The Phillips Curve and the Short-Run Aggregate Supply Curve

● Equilibrium occurs at the intersection of the aggregate demand and aggregate supply curves

inflation are determined.

● The first building block of aggregate supply and demand analysis is the aggregate demand

curve: describes the relationship between the quantity of aggregate output demanded and the

inflation rate when all other variables are held constant.

Aggregate Demand

3.Government purchases

Aggregate demand is made up of four component parts:

1 Consumption expenditure (C): the total demand for consumer goods and services;

2 Planned investment spending (I): the total planned spending by business firms on new machines, factories,

and other capital goods, plus planned spending on new homes;

3 Government purchases (G): spending by all levels of government (federal, state, and local) on goods and

services (paper clips, computers, computer programming, missiles, government workers, and so on);

4 Net exports (NX): the net foreign spending on domestic goods and services, equal to exports minus imports

Yad = C + I + G +NX (1)

• When the inflation rate rises (π ↑ ), the monetary authorities will raise the real interest rate (r ↑ ) => keep

inflation from spiraling out of control

π ↑ => r ↑ => (I ↓ ) => (Yad ↓ )

decreases aggregate demand

and shifts the AD curve to the

left

7 basic factors (often referred to as demand shocks) can shift the aggregate demand curve to a new position:

(7) Financial frictions.

1 Autonomous monetary policy: When the Federal Reserve decides to increase this autonomous component of

the real interest rate, r, the higher real interest rate at any given inflation rate leads to a higher cost of financing investment projects, which leads to a decline in investment spending and the quantity of aggregate demand, as the following schematic demonstrates.

Therefore aggregate demand falls at any given inflation rate and the aggregate demand curve shifts to the left as in Figure 1.

r ↑ => I ↑ => Yad ↓

2 Government purchases An increase in government purchases at any given inflation rate adds directly to

aggregate demand expenditure, and hence aggregate demand rises:

Aggregate demand, therefore, rises at any given inflation rate and the aggregate demand curve shifts to the right as

in Figure 2.

↑ => Yad ↑

3 Taxes: At any given inflation rate, an increase in taxes lowers disposable income, which will lead to lower

consumption expenditure and aggregate demand, so that aggregate demand falls:.

Aggregate demand falls at any given inflation rate and the aggregate demand curve shifts to the left as in Figure 1 ↑   => ↓ => Yad ↓

4 Autonomous net exports: Autonomous An autonomous increase in net exports at any given inflation rate adds

directly to aggregate demand and so raises aggregate demand:

Aggregate demand rises at any given inflation rate and the aggregate demand curve shifts to the right as in Figure 2.

=> Yad ↑  

5 Autonomous consumption expenditure: When consumers become more optimistic, autonomous consumption

expenditure rises and so they spend more at any given inflation rate Aggregate demand therefore rises:

Aggregate demand rises at any given inflation rate, and the aggregate demand curve shifts to the right as in Figure 2.

=> Yad ↑  

6 Autonomous investment: When businesses become more optimistic, autonomous investment rises and they

spend more at any given inflation rate Planned investment increases, and aggregate demand rises.

7 Financial frictions: When financial frictions increase, the real cost of borrowing increases, so that planned

investment spending falls at any given inflation rate and aggregate demand falls.

Aggregate demand falls at any given inflation rate, and the aggregate demand curve shifts to the left as in Figure 1

=> I ↓ => Yad ↓  

, , , ↑, , ,creases aggregate demand and shifts the AD

curve to the right

The conclusion: Aggregate demand increases at any given inflation rate, and the aggregate demand curve shifts to

the right when there is:

Conversely, the aggregate demand curve shifts to the left when any of these factors change in the opposite direction.

r ↓ , , ↓ , , , , => Yad ↑

Aggregate supply curve

The long-run aggregate supply curve.

The short-run aggregate supply curve

Aggregate supply curve: the relationship between the quantity of output supplied and the price.

The amount of output that can be produced in the economy in the long run is determined by:

Some unemployment cannot be helped because it is either frictional or structural => unemployment is not at zero, but

is rather at a level above zero at which the demand for labor equals the supply of labor This natural rate of

unemployment is where the economy gravitates to in the long run.

 The level of aggregate output produced at the natural rate of unemployment is called the natural rate of output but is more often referred to as potential output.

 Potential output is where the economy settles in the long run for any inflation rate Hence the

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Figure 3: Long- and Short-Run Aggregate Supply Curves

The amount of aggregate output supplied at any given inflation rate is at potential output in the long run, so that the long-run aggregate supply curve LRAS is a vertical line at Yp The short-run aggregate supply curve, AS, is upward-sloping because as Y rises relative to YP, labor markets get tighter and inflation rises.

AS

Aggregate Output, Y

Yp

The short-run aggregate supply

curve is based

1 Expectations of inflation

2 Output gap and

3 Price (supply) shocks

1 Expected Inflation, π e : Workers and firms care about wages in real terms When workers expect t he price level

to be rising, they will adjust nominal wages upward one-for-one with the rise in expected inflation, so that the real wage rate does not decrease Because wages are the most important cost of producing goods and services, overall inflation will also rise one for one with increases in expected inflation.

2 Output Gap:

 Out gap is the difference between aggregate output and potential output , (Y – Yp).

 When Y>Yp -> Workers will demand higher wages and firms will Pπ ↑

 When Y< Yp => workers will accept smaller increases in wages and firms will need to P ↓ => π ↓

=> The short-run aggregate supply curve will therefore be upward-sloping, as is depicted in Figure 3, because the higher is

aggregate output, the greater is the output gap, the less slack there is in the economy, and inflation will be higher.

3 Price (Supply) Shocks :

 Supply shocks occur when there are shocks to the supply of goods and services produced in the economy that translate

into price shocks.

 That is, shifts in inflation that are independent of the amount of slack in the economy or expected inflation

3 Price (Supply) Shocks :

3 Price (Supply) Shocks :

Price shocks could also come from a rise in import prices or from cost-push shocks, in which workers push for wages higher than productivity gains, thereby driving up costs and inflation.

2007–2008 and again in 2011

Short- Run Aggregate Supply Curve: a short-run aggregate supply curve that can be written as follows:

 Wages and prices are sticky, meaning that the aggregate price level adjusts slowly over time

becomes so large that the short-run aggregate supply curve is vertical, and it would be identical to the long-run aggregate supply.

The quantity of output supplied in the long run is determined by the three factors that cause potential output to change and thus shift the long-run aggregate supply curve:

produce goods and services

When any of these three factors increases, potential output rises, say, from to , and the long-run aggregate supply

curve shifts to the right from LRAS1 to LRAS2, as in Figure 4.

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Figure 4 Shift in the Long-Run Aggregate Supply Curve

The long-run aggregate supply curve shifts to the right from LRAS1 to LRAS2 when there is (1) an increase

in the total amount of capital in the economy, (2) an increase in the total amount of labor supplied in the

economy, (3) an increase in the available technology, or (4) a decline in the natural rate of unemployment.

An opposite movement in these variables shifts the LRAS curve to the left.

 Because all three of these factors typically grow fairly steadily over time, YP and the long-run aggregate supply

curve will keep on shifting to the right at a steady pace

unemployment If the natural rate of unemployment declines, labor is being more heavily utilized => so

potential output will increase

 The conclusion: The long-run aggregate supply curve shifts to the right when there is:

(1) An increase in the total amount of capital in the economy,

(2) An increase in the total amount of labor supplied in the economy,

(3) An increase in the available technology, or

(4) A decline in the natural rate of unemployment.

And an opposite movement in these variables shifts the LRAS curve to the left.

 The conclusion: The long-run aggregate supply curve shifts to the right when there is:

(1) An increase in the total amount of capital in the economy,

(2) An increase in the total amount of labor supplied in the economy,

(3) An increase in the available technology, or

(4) A decline in the natural rate of unemployment.

And an opposite movement in these variables shifts the LRAS curve to the left.

Shift the short-run aggregate

1 Expected Inflation, π e : A rise in expected inflation causes the short-run aggregate supply curve to shift upward

and to the left Conversely, a decline in expected inflation causes the short-run aggregate supply curve to shift down

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Figure 5: Shift in the Short-Run Aggregate Supply Curve from Changes in Expected Inflation and Price Shocks

A rise in expected inflation or a positive price shock shifts the short-run aggregate supply curve upward

from AS1 to AS2 (A decrease in expected inflation or a negative price shock would lead to a downward shift of the AS curve.)

AS1

Aggregate Output, Y

Step 2 shifts the short-run aggregate supply curve upward.

Step 1 A rise in expected ination or a positive price shock

3 Persistent Output Gap :

 When aggregate output is above potential output, so that a persistent positive output gap exists, the short-run aggregate supply curve shifts up and to the left

 Conversely, when aggregate output falls below potential output, the short-run aggregate supply curve shifts down and to the right

=> Only when aggregate output returns to potential output does the short-run aggregate supply curve stop shifting.

 Figure 7 illustrates a short-run equilibrium in which the quantity of aggregate output demanded equals the quantity of output supplied In

 Figure 7, the short-run aggregate demand curve AD and the short-run aggregate supply curve AS intersect at point E with

an equilibrium level of aggregate output at Y* and an equilibrium inflation rate at π*

 Self-Correcting Mechanism: The self-correcting mechanism occurs because the short-run aggregate supply curve shifts

up or down to restore the economy to the long-run equilibrium at full employment (aggregate output at potential) over time.

AS1 AS3

AD1 AD2

YP Y2

A positive demand shock that shifts the aggregate demand curve to the right to

AD2 The economy moves up the short-run aggregate supply curve AS1 topoint 2,

and both output and inflation rise to Y2 and ¶2.

eventually shift upward to AS3

The economy (equilibrium) thus moves up

the AD2 curve from point 2 to point 3, which is the point of long-run equilibrium

where inflation equals ¶3 and output returns to Y P

Note the analysis here assumes that each of these positive demand shocks occurs holding everything else constant Specifically this means that the central bank is assumed to not be responding to demand shocks

- By early 1981, the Federal Reserve had raised the federal funds rate to over 20%, which led to a sharp increase in real interest rates.

- The autonomous tightening of monetary policy decreased aggregate

demand and shifted the aggregate demand curve to the left from AD1 to

AD2.

- The economy moved to point 2, indicating that unemployment would rise and inflation would fall With unemployment above the natural rate and output below potential, the short-run aggregate supply curve

shifted downward and to the right to AS3.

- The economy moved toward long-run equilibrium at point 3, with inflation continuing to fall, output rising back to potential output, and the unemployment rate moving toward its natural rate level

¶1

business spending, decreasing aggregate demand and shifting the

aggregate demand curve to the left from AD1 to AD2.

- At point 2, as our aggregate demand and supply analysis predicts, unemployment rose and inflation fell

With unemployment above the natural rate (estimated to be around 5%) and output below potential, the shortrun aggregate supply curve shifted

downward to AS3.

- The economy moved to point 3, with inflation falling, output rising back

to potential output, and the unemployment rate returning to its natural rate level

- By 2004, the self-correcting mechanism feature of aggregate demand and supply analysis began to come into play, with the unemployment rate dropping back to 5.5%

When the temporary shock involves a restriction in supply, we refer to this type of supply shock as a negative (or unfavorable) supply shock, and it results in a rise in

commodity prices

When the supply shock involves an increase in supply, it is called a positive (or favorable) supply shock.

Permanent Supply Shocks

the supply of oil that causes prices to rise

The permanent supply shock will result in higher prices, there will be an immediate rise in inflation, and so the short-run aggregate supply curve will shift up

Real Business Cycle Theory

is the level of national output necessarily maximizes expected  utility, and governments should therefore concentrate on long-run structural policy changes and not intervene through discretionary fiscal  or monetary policy designed to actively smooth out economic short-term fluctuations

Because the supply shock is temporary, productive capacity in the economy does not change , and so YP and the long-run aggregate supply curve LRAS

the left from AS1 to AS2.

- The economy will move up the aggregate demand curve from point 1 to point 2, where

inflation rises above ¶1 but aggregate output falls below Y P We call a situation of rising

inflation but a falling level of aggregate output, stagflation (a combination of the words

stagnation and inflation)