GROUP 2 RGDP AND PRICE LEVELS ASAD DIAGRAMS

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GROUP 2 RGDP AND PRICE LEVELS ASAD DIAGRAMS Powered By Docstoc
					Group 2:
RGDP and Price Levels
AS/AD Diagrams
Ari Steier, Stephanie George, Bridget Sanelli
Block 3
RGDP and Price Levels
What is GDP?
   Gross Domestic Product
    The total market value of all goods and services produced
     within a nation’s borders in a given time period
    Designed to measure value of production that flows through
     economy


   How do we Measure it?
    Sum of all final goods and services produced for the market
     in a given time period
      Each good/ service valued at its market price
RGDP and Price Levels
What is Potential GDP (PGDP)?
   Level of RGDP that the economy would produce if it
    were at full employment
RGDP and Price Levels
What is Inflation?
   An increase in the average level of prices
     Not a change in a specific price
     Measured as an annual percent increase


   How do we measure it?
     Measured by the change in the some index of general price
      level
     Main Indices
       Consumer Price Index (CPI): measures changes in av. Prices of
         consumer goods and services
       The GDP Deflator: looks at all goods and services in an economy
RGDP and Price Levels
When we have unanticipated inflation, who wins
 and who loses?
   Winners
    Borrowers
    The government
    Banks when they receive savings from individuals
    Employers with employees with long term contracts
    Pensions Funds
   Losers
    Banks as lenders
    Tax Payers
    Families who save money and “loan” it to banks
    Workers on long term contractors
    People living on private pension
RGDP and Price Levels
What is the historical relationship between
 wages and P.L.s?
   Wages up P.L.s go up because people have more
    money to spend and demand increases
   Wages down, P.L.s down because demand decreases
    because there is less money to spend
What is the difference between GDP
Deflator and the CPI ?

CPI measures changes in average prices of consumer
 goods and services while GDP Deflator looks at all
 goods and services in an economy

What is crowding out? When is it more
likely to occur?
Crowding out is the reduction in private sector
 spending
   Reduction in (I) caused by increase in government
    spending (G)
   Tends to occur when government does two things
     Use deficit spending, therefore, selling bonds to borrow money
     Use expansionary fiscal policy which tends to increase (i) and it
      occurs in vertical range of AS curve
What is crowding in? when is it more
likely to occur?
Crowding in is an increase in (G) causes an
 increase in (I) and it occurs in horizontal range of
 AS curve
What happens to gdp and price levels
when ad and/or as shift?
When AD shifts to the right, both PL’s and EGDP
 increase
When AD shifts left, both PL’s and EGDP
 decrease
When AS shifts right, PL’s decrease and EGDP
 increase
When AS shifts left, PL’s increase and EGDP
 decrease
What factors cause a change in ad and as
(shift the curves)?
Main cause of shift of AS curve is a change in
 costs of production
If costs decrease with steady PL’s, AS increase
 and shifts right
If costs increase with steady PL’s, AS decreases
 and shifts left
Main cause of shift of AD curve is a change in
 spending from one or more sectors of spending in
 economy (I + C + G + (X-IM)
What is the impact of having a very
steep as curve? A very flat as curve?
A very steep AS curve includes:
   Increase RGDP, spending, resource utilization, costs
   Scarce resources
A very flat AS curve includes:
   Decrease RGDP, spending, costs
   Lots of resources
How does the level of resource utilization
affect changes in PL’s and rgdp when there
are changes in ad?
How is price level related to the slope and
shape of the as and ad curves?
AS:
   Horizontal Range- flatter slope, small increases in
    price levels with large increases in AS
   Vertical Range- steeper slope, large increases in price
    levels accompanied with increases in AS
     Inflation
Does the intersection of as and ad necessarily
occur at full employment?
No

What occurs if there is an adverse shift
of the as curve?
Stagflation
   Rate of inflation increases at the time RGDP
    decreases
   Increase in cost of production causes decrease in AS
      Results in increase in P.L.s and decrease in EGDP

				
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