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Chapter 20 Aggregate Demand and Aggregate Supply

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					           Chapter 20
Aggregate Demand and Aggregate
             Supply
       Economy in short-run
                  Content
• Properties of short-run economy

• Aggregate demand and Aggregate supply

• Explanations of Economic Fluctuation in short-
  run
  Properties of Economy in Short-Run
• Economic Fluctuations are unpredictable
  – Business cycle


• Most Macroeconomic variables fluctuate
  together

• As Output increases, Unemployment falls
    Failure of the Classical Model
• Classical models are based on two theories:
  dichotomy and money neutrality

• Classical models can not explain short-run
  economic phenomenon

• Classical models exclude the possibility of
  policy intervention
    Aggregate Supply and Aggregate
           Demand Model
• Two variables: Price (nominal variable) and
  Output (real variable)

• Aggregate Demand: total demand in an economy

• Aggregate Supply: total supply in an economy

• Difference between AD-AS model and a particular
  market
      Aggregate Demand Curve
• Demand curve is determined by total
  expenditure: Y = C + I + G + NX
    Shape of Aggregate Demand
• Price with Consumption: Wealth Effect

• Price with Investment: The Interest-Rate Effect
  – Price decrease=>holding fewer cash=>too much
    savings in Banks=>supply of loans
    increases=>interest rate decreases
    Shape of Aggregate Demand
              (cont’d)
• Price with Net Export: The Exchange-Rate
  Effect
  – Price decreases=>interest rate
    decreases=>demand for dollar
    decreases=>depreciation of dollar=>American
    product cheaper=>more export
 Shift of Aggregate Demand Curve
• Changes from C, I, G and NX

• Money Supply changes => Shift of Aggregate
  Demand
       Aggregate Supply Curve
       (long-run and short-run)
• Aggregate Supply Curve in the long-run
  – Vertical


• Aggregate Supply Curve in the short-run
               AS in long-run
• Shifts of AS (potential output)
  – Labor
  – Capital
  – Natural Resources
  – Technological Knowledge

• Combine AD and LRAS => Long-run economy:
  output growth and inflation (MS and Tech
  changes)
 Aggregate Supply Curve in Short-
              run
• Shape of SRAS
  – The quantity of output supplied deviates from its
    long-run, or “natural”, level when the actual price
    level in the economy deviates from the price level
    that people expected to prevail.
        Shape of SRAS (cont’d)
• Explanations of the shape of SRAS
  – Sticky-wage theory: labor contract is
    fixed=>suddenly price higher than
    expected=>producers receive higher price but pay
    lower wage=>increase their production
  – Sticky-price theory: producers can’t change price
    immediately when confront unexpected price
    increases(menu cost)=>their products
    cheaper=>demand increases=>more production
• Explanations of the shape of SRAS (cont’d)
  – The Misperception Theory: price higher than
    expected=>producers mistake it as real=>produce
    more


• Summary
  actual output – natural output = a (actual
  price – expected price level)
                Shift of SRAS
• L, C, N, A and expected price level
  – Expected price level increases => decrease actual
    output
               Case Study
• Great Depression
  – AD


• Oil Shock
  – AS

				
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posted:9/27/2012
language:English
pages:16