aggregate demand/aggregate supply the alpha and omega of macroeconomics graphs
TRANSCRIPT
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Aggregate Demand/Aggregate Supply
The Alpha and Omega of Macroeconomics Graphs
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Consumption
Capital
Production Possibilities Curve/Gross Domestic Product Connection
.A
10
5
Assume this economy is fully employing all of its resources in the least costly way (Productive Efficiency) and chooses to produce at point “A” (Allocative Efficiency)
Assume this economy can produce 5 Capital goods and servicesAnd 10 consumption goods and services
Assume one capital G/S costs $5.00 and 1 consumption G/S costs $1.00
What is this economy’s GDP?
5 Capital G/S X $5.00 = $25.0010 Consumption G/S x $1.00 = $10.00
GDP - $35.00
This GDP represents Full-Employment or “Potential GDP”.
Real GDP
PriceLevel
LRAS
$35FE ***Point “A” on the PPC is the same
thing as Full Employment Real GDPRepresented by LRAS – only expressedIn $$$$$$***
Aggregate Demand/Aggregate Supply
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Price Level
Real GDPFE RGDP
LRAS
0
Between 0 and FE RGDP is a large range of Dollar value of GDP. EVERYONE of these Points to the LEFT of FE RGDP will represent RGDP values that are LESS than our Full-Employment POTENTIAL RGDP.
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Price Level
Real GDPFE RGDP
LRAS
0
REMEMBER: To Calculate RGDP we take Nominal GDP (Price x Quantity) and factor out changes in Price relative to a base year.
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1
This is ACTUAL RGDP This is POTENTIAL RGDP
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1
If the economy was producing this amount of RGDP relative to the FE RGDP it is in serious trouble. It is way inside its productive capacity. Resource prices (Input prices) and wage rates are going to be low because there is VERY high Unemployment and a high supply of unused resources (Inputs)
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Price Level
Real GDPFE RGDP
LRAS
RGDP1
PL1
RGDP2
If we move to the production of RGDP2 we can see the economy is using MORE of its slack resources to produce RGDP (Inputs AND people) BUT the Price Level is steady…This is because we STILL have relatively HIGH Unemployment and there is still enough slack resources to keep their prices Low.
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3
This will continue over a range of RGDP production…
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4
This will continue over a range of RGDP production until we come to this next important point…
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5
What we have constructed so far is a range of production of RGDP that the economy CAN produce, but is not desirable…In the LONG RUN we hope to be at FE RGDP, but because of the current conditions the economy, in the SHORT RUN, can produce any one of these RGDP levels
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5
Hence, we have ONE part of our SHORT RUN AGGREGATE SUPPLY CURVE---The Horizontal, or Keynesian, Range.
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5
This will continue over a range of RGDP production…
UNTIL….
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6
…We reach RGDP6…Notice that NOW the Price Level INCREASES to PL2…As we move closer to FE RGDP we are getting to LOWER levels of Unemployment and are using more input resources so now these limited resources are beginning to become MORE scarce. When inputs and wages start to rise, what happens to the Cost of Production?? INCREASES…
PL2
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
Producers need to get a higher price to reflect the increasing input costs. The Producers will INCREASE the Quantity Supplied of RGDP when the Price Level INCREASES…
PL2
PL3
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
RGDP8
PL2
PL3
PL4
THIS POINT IS VERY IMPORTANT!!!!
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
RGDP8
PL2
PL3
PL4
At this point, ACTUAL RGDP is EQUAL to POTENTIAL RGDP…This economy’s ability to Produce RGDP in the SHORT RUN is now EQUAL to the Economy’s ability to Product RGDP in the LONG-RUN…
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
RGDP8
RGDP9
PL2
PL3
PL4
PL5
What about this NEXT point? Can our economy produce at this point?
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
RGDP8
RGDP9
PL2
PL3
PL4
PL5
IN THE SHORT RUN it can, but it will NOT be sustainable…Now Unemployment is BELOW the Natural Rate of Unemployment and Inputs are very scarce. The pressure on wages will INCREASE. The economy is up against a wall. There will not be any increase in Quantity Supplied at this point.
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
RGDP8
RGDP9
PL2
PL3
PL4
PL5
This Range of the SHORT RUN AGGREGATE SUPPLY CURVE is called the INTERMEDIATE RANGE…
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
RGDP8
RGDP9
PL2
PL3
PL4
PL5
PL6
We have reach the END of this economy’s ability to Produce RGDP….The SHORT RUN AGGREGATE SUPPLY CURVE Becomes VERTICAL and Parallels the LRAS CURVE…
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
RGDP8
RGDP9
PL2
PL3
PL4
PL5
PL6
PL7 SRAS
The VERTICAL RANGE of the SRAS Curve is called the Classical Range…More on what the Classical and Keynesian Range mean later….
Classical Range
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Price Level
Real GDPFE RGDP
LRAS
PL1
RGDP1RGDP2 RGDP3RGDP4RGDP5RGDP6RGDP7
RGDP8
RGDP9
PL2
PL3
PL4
PL5
PL6
PL7 SRAS
Let’s take away all the “stuff” and see what we are left with….
Classical Range
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Price Level
Real GDPFE RGDP
LRAS
SRAS
This is how I like to represent the “SUPPLY-SIDE” of the Economy. There are 3 distinct sections to the SRAS curve and it extends beyond the LRAS curve and then becomes vertical again….This just shows that an economy CAN produce beyond it productive capacity, but does so at it’s peril…Now we will insert an Aggregate Demand Curve and start with serious analysis on the economy.
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Aggregate Supply (AS) ShiftersChanges in spending not caused by Price Level
Changes in INPUT prices for land, labor, capital, and entrepreneurship
THE FACTORS OF PRODUCTION
1. Before the Change
2. The change
3. After the change
Change in Market Power (unions, presence of monopolies)
1. Before the Change
2. The change
3. After the change
Change in Productivity 1. Before the Change
2. The change
3. After the change
Change in Government policies – business taxes, subsudies, regulations
Change in value of currency
1. Before the Change
2. The change
3. After the change
Pric
e Le
vel
Pric
e Le
vel
Pric
e Le
vel
Pric
e Le
vel
GDP
GDP
GDP
GDP
(AS)
(AS)
(AS)
(AS)
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
Unions grow more aggressive; wage rate increases.
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
OPEC successfully increases oil price
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
Labor productivity increases dramatically
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
Giant natural gas discovery decreases energy prices.
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
Computer technology brings new levels of efficiency to industry.
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
Research shows that improved schools have increased the skills of American workers and managers.
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
Government increases regulation of industry to address pollution problem
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
The dollar depreciates in foreign exchange markets
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
President announces cuts in farm and business subsidies.
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
Business taxes fall.
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Price Level
Real GDP
SRAS
Aggregate Demand /Aggregate Supply
SRAS1
New low-cost means of extracting oil from shale is discovered
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Introduction to Aggregate Demand
AD
GDP
Price Level
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AD
GDP
Price Level
Why is Aggregate Demand Curve Downward Sloping
1.According to the AD curve, what is the relationship between Price Level and Real GDP?
There is an inverse relationship; the lower the price level, the higher the Real GDP or real output.
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AD
GDP
Price Level
Why is Aggregate Demand Curve Downward Sloping
Explain how each of the following effects helps explain why the AD curve is downward sloping?
Interest Rate Effect
A lower price level decreases the demand for money, which decreases the interest rate and increases investment and interest sensitive components of consumption and, therefore, Real GDP or real output.
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AD
GDP
Price Level
Why is Aggregate Demand Curve Downward Sloping
Wealth Effect or Real Balance Effect
As the price level falls, cash balances will buy more so people will spend more, thus increasing Real GDP or Real Output.
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AD
GDP
Price Level
Why is Aggregate Demand Curve Downward Sloping
Net Export or International Trade Effect
A lower U.S. price level means prices for goods produced in the U.S. are lower relative to the prices in foreign countries. Thus people will buy more U.S. produced goods and fewer foreign produced goods. This increases net exports, a component of GDP
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Aggregate Demand (AD) ShiftersChanges in spending not caused by Price Level
1. Before the Change
2. The change
3. After the change
Change in Net Exports (Nx) caused by a change in national income abroad, or exchange rate of money
1. Before the Change
2. The change
3. After the change
Change in Government (G) spending
1. Before the Change
2. The change
3. After the change
Change in Investment (I) caused by a change in interest rates, profit expectations, business taxes, technology, or excess capacity
1. Before the Change
2. The change
3. After the change
Change in consumer spending (C) caused by a change in wealth, expectations, indebtedness, personal taxes
Pl
Pric
e Le
vel
GDP
(AD)
Pl
Pric
e Le
vel
GDP
(AD)
GDP
(AD)Pric
e
Le
vel
Pric
e
Le
vel
GDP
(AD)
Pric
e
Le
vel
GDP
(AD)
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Bottom Line of Aggregate Demand
(AD)Aggregate Demand is driven by the
Components of GDP
AD = C + I + G + N(x)
When one of these variables change, either positively or negatively
(increase or decrease), AD curve will move right or left
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In the slides that follow, read the situation and determine if it causes an increase, decrease or
no change in AD. DO NOT CLICK ON THE YELLOW BARS.
They are hot linked and will take you to a different part of the PPT. Just choose in your mind the direction you think AD will
shift
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Increase AD
Decrease AD
No Change in AD
Situation: Congress cuts taxes.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: Investment spending decreases.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: Government spending increases; President promises no tax increases.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: Survey shows consumer confidence jumps.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: Stock market collapses; investors lose billions.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: Productivity rises for the fourth straight year.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: President/Congress cut defense spending by 20 percent; no increase in domestic spending.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: Consumer indebtedness rises.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: Dollar appreciates in foreign exchange markets.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
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Increase AD
Decrease AD
No Change in AD
Situation: Business profit expectations fall.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
![Page 54: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/54.jpg)
Increase AD
Decrease AD
No Change in AD
Situation: The price of imported resources skyrockets.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
![Page 55: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/55.jpg)
Increase AD
Decrease AD
No Change in AD
Situation: Consumers expect the price level to rise.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
![Page 56: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/56.jpg)
Increase AD
Decrease AD
No Change in AD
Situation: Consumer wealth plummets as stock prices fall.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
![Page 57: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/57.jpg)
Increase AD
Decrease AD
No Change in AD
Situation: Excess plant capacity decreases significantly.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
![Page 58: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/58.jpg)
Increase AD
Decrease AD
No Change in AD
Situation: Interest rates rise.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
![Page 59: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/59.jpg)
Increase AD
Decrease AD
No Change in AD
Situation: Foreign incomes fall.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
![Page 60: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/60.jpg)
Increase AD
Decrease AD
No Change in AD
Situation: Dollar value depreciates in foreign exchange markets.
PriceLevel
Real GDP
AD ADAD
A B C
Always start at curve B. Click the correct curve to go to the next slide.
![Page 61: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/61.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
This AD/AS Model of the Economy shows an economy in TROUBLE…Aggregate Demand is intersecting Aggregate Supply on the HORIZONTAL section of SRAS...This economy is in a SEVERE RECESSON boardering on a DEPRESSION.
Unemployment Rate15%(?)
![Page 62: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/62.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
A VERY large Recessionary Gap
This means it is currently producing a RGDP that is WAY inside its ability to produce RGDP .
Unemployment Rate15%(?)
![Page 63: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/63.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
Aggregate Demand INCREASES from AD1 to AD2
Still a LARGE Recessionary GapBut not a large as before
Unemployment Rate10%(?)
![Page 64: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/64.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP3
Aggregate Demand INCREASES from AD2 to AD3
The Recessionary GapIs shrinking…
Unemployment Rate8%(?)
![Page 65: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/65.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP3
Aggregate Demand INCREASES from AD2 to AD3
The Recessionary GapIs shrinking…
As AD INCREASES from AD1 to AD3 the economy is INCREASING it’s RGDP but the Price Level is NOT INCREASING….WHY????
![Page 66: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/66.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP3
Aggregate Demand INCREASES from AD2 to AD3
The Recessionary GapIs shrinking…
Between RGDP1 and RGDP3 there are lots of under-employed resources ( excess inventories) AND PEOPLE---Unemployment is very high..When unemployment and Inventories are high there is little to NO pressure on prices to increase because there is plenty of “slack resources”. Even though RGDP is Increasing the is no upward pressure on the Price Level over this range of RGDP.
![Page 67: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/67.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP4
AD4
RGDP3
PL2
Recessionary Gap
BUT….the story changes as the economy moves to AD4 . RGDP INCREASES but so does the PRICE LEVEL….As we approach Full-Employment (closer to where SRAS intersects LRAS) the economy has FEWER slack resources (inventories are decreasing) AND Unemployment is DECREASING more rapidly…There is INCREASING pressure on the PRICE LEVEL to INCREASE…
Unemployment Rate7%(?)
![Page 68: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/68.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP4
AD4
RGDP3
PL2
Recessionary Gap
This is NOT dangerous for the Economy at this point…Actually it can be quite healthy…Increasing prices are GOOD for Business and Increasing wages are GOOD for Workers…
![Page 69: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/69.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP4
AD4
RGDP3
PL2
AD5
PL3
RGDP5
As a matter of fact, when AD5 intersects SRAS and LRAS the Economy is considered to be at FULL-EMPLOYMENT---The Sweet Spot for this economy…The total demand for goods and services EQUALS the economy’s ability to produce those goods and services in the Short Run (SRAS) AND the Long Run (LRAS)
Unemployment Rate5%(?)=NRU
![Page 70: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/70.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP4
AD4
RGDP3
PL2
AD5
PL3
RGDP5
At FULL-EMPLOYMENT we have eliminated the Recessionary Gap. A couple of KEY points about this Equilibrium:
1.The economy is at its Natural Rate of Unemployment (Frictional + Structural) with NO cyclical unemployment
![Page 71: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/71.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP4
AD4
RGDP3
PL2
AD5
PL3
RGDP5
At FULL-EMPLOYMENT we have eliminated the Recessionary Gap. A couple of KEY points about this Equilibrium:
2. The Economy is at its: “NON-ACCCELERATING
INFLATION RATE OF UNEMPLOYMENT
(NAIRU)Fancy way of saying we are “Inflation Neutral” at the Natural Rate of Unemployment
(NRU)
![Page 72: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/72.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP4
AD4
RGDP3
PL2
AD5
PL3
RGDP5
AD6
PL4
RGDP6
If the AD shifts to AD6 the economy has now gone beyond FULL-EMPLOYMENT and is now producing RGDP6 . The unemployment rate is now something LESS than the NRU (wages will start to increase faster)…The Economy is starting to overheat !(Demand for goods and services is GREATER than the economy’s ability to produce goods and services!...
Unemployment Rate3%-- less than theNRU
Infla
tiona
ryG
ap
![Page 73: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/73.jpg)
PriceLevel
Real GDP
SRASLRAS
FERGDP
AD1
PL1
RGDP1
AD2
RGDP2
AD3
RGDP4
AD4
RGDP3
PL2
AD5
PL3
RGDP5
AD6
PL4
RGDP6
PL5
RGDP7
AD7
If AD increases to AD7 then we have a LARGE increase in PRICE LEVEL with NO increase in RGDP (RGDP7 = RGDP6 ) This economy is in TROUBLE---INFLATION Is the Problem of the Day….
Infla
tion
ary
Gap
![Page 74: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/74.jpg)
![Page 75: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/75.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
AD1
![Page 76: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/76.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
ADPL1
PL*
AD1
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
RGDP1
![Page 77: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/77.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
AD
PL1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
SRAS1
STAGFLATION
RGDP1
![Page 78: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/78.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
SRAS1
![Page 79: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/79.jpg)
Directions for the next set of slides: Analyze the situation or event and
determine the effect on AD or short run AS. Shift the appropriate curve and
determine change in PL, Real GDP and Unemployment.
![Page 80: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/80.jpg)
Price Level
Real GDPFeRGDP
LRAS SRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
AD1
Congress passes a tax cut for the middle class, and the president signs it.
![Page 81: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/81.jpg)
Price Level
Real GDPFeRGDP
LRAS SRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
SRAS1
New oil discoveries cause large decreases in oil prices
![Page 82: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/82.jpg)
Price Level
Real GDPFeRGDP
LRAS SRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
AD1
The government increases spending on schools, highways, and other public works
![Page 83: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/83.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
AD
PL1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
SRAS1
STAGFLATION
RGDP1
Production costs increase nationwide
![Page 84: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/84.jpg)
Price Level
Real GDPFeRGDP
LRAS SRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
SRAS1
New technology and better education increase productivity.
![Page 85: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/85.jpg)
Price Level
Real GDPFeRGDP
LRAS SRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
AD1
A new president makes consumers and businesses more confident about the future economy
![Page 86: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/86.jpg)
Price Level
Real GDPFeRGDP
LRAS SRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
AD1
With the unemployment rate at five percent, the federal government reduces personal taxes and increases spending
![Page 87: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/87.jpg)
Price Level
Real GDPFeRGDP
LRAS SRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
AD1
Foreign incomes increase
![Page 88: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/88.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
ADPL1
PL*
AD1
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
RGDP1
Excess plant capacity increases.
![Page 89: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/89.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
SRAS1
Dollar appreciates; relative prices of imported resources fall.
![Page 90: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/90.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
ADPL1
PL*
AD1
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
RGDP1
Consumer indebtedness increases; consumption falls
![Page 91: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/91.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
ADPL1
PL*
AD1
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
RGDP1
Interest rates rise; business investment falls.
![Page 92: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/92.jpg)
Price Level
Real GDPFeRGDP
LRASSRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
SRAS1
A new administration increases subsidies to businesses.
![Page 93: Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs](https://reader033.vdocuments.net/reader033/viewer/2022061305/55145715550346414e8b5414/html5/thumbnails/93.jpg)
Price Level
Real GDPFeRGDP
LRAS SRAS
AD
PL1
RGDP1
PL*
Aggregate Demand /Aggregate Supply
What happened to:
Price Level INC DEC
RGDP INC DEC
Unemployment INC DEC
AD1
Promising research increases business profit expectations.