Economics principles tools and applications 9th by sullivan sheffrin perez chapter 09

The aggregate demand curve slopes downward, indicating that the quantity of aggregate demand increases as the price level in the economy falls... As the purchasing power of money changes

Trang 1

Trang 2

9.1 Explain the role sticky wages and prices play in economic fluctuations.

9.2 List the determinants of aggregate demand.

9.3 Distinguish between the short run and long run aggregate supply curves.

9.4 Explain how the short-run aggregate supply curve shifts over time.

Trang 3

Fluctuations in the economy can be seen as failures in coordination.

Flexible and Sticky Prices

• For most firms, the biggest cost of doing business is wages If wages are sticky, firms’ overall costs will be sticky as well This means that firms’ product prices will remain sticky, too

• Sticky wages cause sticky prices and hamper the economy’s ability to bring demand and supply into balance in the short run

How Demand Determines Output in the Short Run

• Short run in macroeconomics

The period of time in which prices do not change or do not change very much

Trang 4

MEASURING PRICE STICKINESS IN CONSUMER MARKETS

APPLYING THE CONCEPTS #1: What does the behavior of prices in consumer markets demonstrate about how quickly prices adjust in the U.S economy?

To analyze the behavior of retail prices, economist Anil Kashyap of the University of Chicago examined prices in consumer catalogs

He looked at the prices of 12 selected goods from:

• L.L Bean

• Recreational Equipment, Inc (REI)

• The Orvis Company, Inc

The goods included shoes, blankets, chamois shirts, binoculars, and a fishing rod and fly

What did he find?

• Considerable price stickiness

Trang 5

What Is the Aggregate Demand Curve?

• Aggregate demand curve (AD)

A curve that shows the relationship between the level of prices and the quantity of real GDP demanded

Trang 6

The Components of Aggregate Demand

The aggregate demand curve plots the total demand for real GDP as a

function of the price level

The aggregate demand curve slopes downward, indicating that the

quantity of aggregate demand increases as the price level in the

economy falls

Trang 7

Why the Aggregate Demand Curve Slopes Downward

REAL-NOMINAL PRINCIPLE

What matters to people is the real value of money or income—its purchasing power—not the face value of money or income.

As the purchasing power of money changes, the aggregate demand curve is affected in three different ways:

THE WEALTH EFFECT

• Wealth effect

The increase in spending that occurs because the real value of money increases when the price level falls

Trang 8

Why the Aggregate Demand Curve Slopes Downward

THE INTEREST RATE EFFECT

With a given supply of money in the economy, a lower price level will lead to lower interest rates

With lower interest rates, both consumers and firms will find it cheaper to borrow money to make purchases

As a consequence, the demand for goods in the economy (consumer durables purchased by households and investment goods purchased by firms) will increase

THE INTERNATIONAL TRADE EFFECT

In an open economy, a lower price level will mean that domestic goods (goods produced in the home country) become cheaper relative to foreign goods, so the demand for domestic goods will increase

Trang 9

Shifts in the Aggregate Demand Curve

CHANGES IN THE SUPPLY OF MONEY

An increase in the supply of money in the economy will increase aggregate demand and shift the aggregate demand curve to the right

CHANGES IN TAXES

A decrease in taxes will increase aggregate demand and shift the aggregate demand curve to the right

CHANGES IN GOVERNMENT SPENDING

At any given price level, an increase in government spending will increase aggregate demand and shift the aggregate demand curve to the right

Trang 10

Shifts in the Aggregate Demand Curve

ALL OTHER CHANGES IN DEMAND

Decreases in taxes, increases in government spending, and an increase in the supply

of money all shift the aggregate demand curve to the right

Higher taxes, lower government spending, and a lower supply of money shift the curve

to the left

Trang 11

How the Multiplier Makes the Shift

Bigger

Initially, an increase in desired spending will shift the

aggregate demand curve horizontally to the right from a

to b

The total shift from a to c will be larger The ratio of the

total shift to the initial shift is known as the multiplier

Trang 12

How the Multiplier Makes the Shift Bigger

Trang 13

• Autonomous consumption spending

The part of consumption spending that does not depend on income

• Marginal propensity to consume (MPC)

The fraction of additional income that is spent

• Marginal propensity to save (MPS)

The fraction of additional income that is saved

Trang 14

Trang 15

TWO APPROACHES TO DETERMINING THE CAUSES OF RECESSIONS

APPLYING THE CONCEPTS #2: How can we determine what factors cause recessions?

Economists have used the basic framework of aggregate demand and supply analysis to explain recessions Recessions can occur either when there is a sharp decrease in demand or a decrease in aggregate supply

Economic historian Peter Temin looked at all recessions from 1893 to 1990 to determine their causes He found, recessions were caused by many different factors

• Sometimes, as in 1929, they were caused by shifts in aggregate demand from the private sector, as consumers cut back their spending

• Other times, as in 1981, the government cut back on aggregate demand to reduce inflation

• Supply shocks were the cause of the recessions in 1973 and 1979

• The most severe shock hit the U.S economy in 1931 and converted an economic downturn into the Great Depression He believes that foreign monetary developments were the ultimate source of this shock to the U.S economy

Trang 16

A curve that shows the relationship between the level of prices and the quantity of output supplied

The Long-Run Aggregate Supply Curve

• Long-run aggregate supply curve

A vertical aggregate supply curve that represents the idea that in the long run, output is determined solely by the factors of production

Trang 17

The Long-Run Aggregate Supply Curve

In the long run, the level of output, yp, is independent of

the price level.

Trang 18

The Long-Run Aggregate Supply

Curve

DETERMINING OUTPUT AND THE PRICE LEVEL

Output and prices are determined at the intersection of AD

and AS

An increase in aggregate demand leads to a higher price

level

Trang 19

The Short-Run Aggregate Supply Curve

• Short-run aggregate supply curve

A relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand

Trang 20

The Short-Run Aggregate

Supply Curve

With a short-run aggregate supply curve, shifts

in aggregate demand lead to large changes in

output but small changes in price

Trang 21

The Short-Run Aggregate Supply Curve

What factors determine the costs firms must incur to produce output? The key factors are

• Input prices (wages and materials)

• The state of technology

• Taxes, subsidies, or economic regulations

Trang 22

Supply Shocks

• Supply shocks

External events that shift the aggregate supply curve

An adverse supply shock, such as an increase in the

price of oil, will cause the AS curve to shift upward

The result will be higher prices and a lower level of

output

• Stagflation

A decrease in real output with increasing prices

Trang 23

OIL PRICE DECLINES AND THE U.S ECONOMY

Trang 24

y0, which exceeds potential output yp.

Trang 25

run AS curve shifts upward over time.

The economy adjusts to the long-run

equilibrium at a1.

Trang 27

Aggregate demand curve (AD)

Aggregate supply curve (AS)

Autonomous consumption spending

Consumption function

Long-run aggregate supply curve

Marginal propensity to consume (MPC)

Marginal propensity to save (MPS)

Multiplier

Short-run aggregate supply curve

Short run in macroeconomics

Stagflation

Supply shocks

Wealth effect

Định dạng
Số trang	27
Dung lượng	6,81 MB