Chapter 12: Aggregate Demand And Aggregate Supply Model

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Chapter 13: Aggregate Demandand Aggregate Supply Model

Chapter 13: Aggregate Demand and Aggregate SupplymodelA model that explains short-run fluctuations in real GDP and the price level.Aggregate demand curve shows the relationship between the price leveland the quantity of real GDP demanded by households, firms, and thegovernment.Short-run aggregate supply curveshows the relationship in the shortrun between the price level andthe quantity of real GDP suppliedby firms.

Why Is the Aggregate Demand Curve DownwardSloping?CThe Wealth Effect: The impact of the price level on consumptionIThe Interest-Rate Effect: The impact of the price level on investmentNXThe International-Trade Effect: The impact of the price level on net exports

The Variables That Shift the Aggregate Demand CurveChanges in Government PoliciesMonetary policy The actions the Federal Reserve takes to manage themoney supply and interest ratesFiscal policy Changes in federal taxes and purchasesChanges in the Expectations of Households and FirmsIf households become more optimistic about their future incomes, theyare likely to increase their current consumption.Changes in Foreign VariablesIf firms and households in other countries buy fewer U.S. goods or if firmsand households in the United States buy more foreign goods, net exportswill fall, and the aggregate demand curve will shift to the left.

The Long-Run Aggregate Supply Curveshows the relationship in the long run between the price level and the quantityof real GDP supplied.The Long-Run AggregateSupply Curve

The Short-Run Aggregate Supply CurveShort-run aggregate supply curve slopes upward because:1 Contracts make some wages and prices “sticky.”2 Firms are often slow to adjust wages.3 Menu costs make some prices sticky.

Macroeconomic Equilibriumin the Long Run and the Short RunLong-RunMacroeconomicEquilibrium

Macroeconomic Equilibriumin the Long Run and the Short RunRecessions, Expansions, and Supply ShocksBecause the full analysis of the aggregate demand andaggregate supply model can be complicated, we begin with asimplified case, using two assumptions:1. The economy has not been experiencing anyinflation. The price level is currently 100, andworkers and firms expect it to remain at 100in the future.2. The economy is not experiencing any long-rungrowth. Potential real GDP is 10.0 trillion andwill remain at that level in the future.

RecessionThe Short-Run and Long-Run Effects of a Decrease inAggregate Demand

ExpansionThe Short-Run and Long- run Effects of an Increase inAggregate Demand

Stagflation: A combination of inflation and recession, usually resulting from asupply shock.The Short-Run and Long-Run Effects of a Supply Shock

A Dynamic Aggregate Demandand Aggregate Supply ModelWe can create a dynamic aggregate demand andaggregate supply model by making three changes to thebasic model. Potential real GDP increases continually, shiftingthe long-run aggregate supply curve to the right. During most years, the aggregate demand curvewill be shifting to the right. Except during periods when workers and firmsexpect high rates of inflation, the short-runaggregate supply curve will be shifting to the right.

What Is the Usual Cause ofInflation?Using Dynamic AggregateDemand and AggregateSupply to UnderstandInflation

The Slow Recovery from theRecession of 2001The recession of 2001 was caused by a decline inaggregate demand. Several factors contributed to thisdecline: The end of the stock market “bubble.” Excessive investment in information technology. The terrorist attacks of September 11, 2001. The corporate accounting scandals.

The Slow Recovery from theRecession of 2001Using Dynamic AggregateDemand and AggregateSupply to Understandthe Recovery from the2001 Recession

The More Rapid Recovery of 2003–2004Using Dynamic AggregateDemand and AggregateSupply to Understand theMore Rapid Recovery of2003–2004

MakingtheConnection Does Rising Productivity GrowthReduce Employment?

The Economy in 2007: ContinuingExpansion or Looming Recession?In late 2007, economists were divided over whether the twinblows of higher oil prices and a declining housing sectorwould be sufficient to push the economy into a recession.The majority of economists forecast that growth in real GDPwould slow but that the economy would not tip intorecession.

Solved ProblemShowing the Oil Shock of 1974–1975 on a Dynamic AggregateDemand and Aggregate Supply GraphACTUALREAL GDPPOTENTIALREAL GDPPRICELEVEL1974 4.32 trillion 4.35 trillion34.71975 4.31 trillion 4.50 trillion38.0

Chapter 13: Aggregate Demand and Aggregate Supply model A model that explains short-run fluctuations in real GDP and the price level. Aggregate demand curve shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government. Short-run aggregate supply curve

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In this chapter, look for the answers to these questions What are economic fluctuations? What are their characteristics? How does the model of aggregate demand and aggregate supply explain economic fluctuations? Why does the Aggregate-Demand curve slope downward? What shifts the AD curve? What is the slope of the Aggregate-Supply curve

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Learning Objectives 1.Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve. 2.Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve.

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