case econ08 ppt_26
TRANSCRIPT
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
Prepared by:
Fernando & Yvonn Quijano
26Chapter
Aggregate Demand,Aggregate Supply,and Inflation
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Chapter Outline
26Aggregate Demand, Aggregate Supply, and Inflation
The Aggregate Demand CurveDeriving the Aggregate Demand CurveThe Aggregate Demand Curve: A WarningOther Reasons for a Downward-Sloping Aggregate Demand CurveAggregate Expenditure and Aggregate DemandShifts of the Aggregate Demand CurveThe Aggregate Supply CurveThe Aggregate Supply Curve: A WarningAggregate Supply in the Short RunShifts of the Short-Run Aggregate Supply CurveThe Equilibrium Price LevelThe Long-Run Aggregate Supply CurvePotential GDPAggregate Demand, Aggregate Supply, and Monetary and Fiscal PolicyLong-Run Aggregate Supply and Policy EffectsCauses of InflationInflation versus Sustained Inflation: A ReminderDemand-Pull InflationCost-Push, or Supply-Side, InflationExpectations and InflationMoney and InflationSustained Inflation as a Purely Monetary PhenomenonLooking Ahead
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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
THE AGGREGATE DEMAND CURVE
Money demand is a function of three variables: the interest rate (r), the level of realincome (Y), and the price level (P). (Remember, Y is real output, or income. It measuresthe actual volume of output, without regard to changes in the price level.) Moneydemand will increase if the real level of output (income) increases, the price levelincreases, or the interest rate declines.
aggregate demand The total demand for goods and services in the economy.
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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
THE AGGREGATE DEMAND CURVE
FIGURE 13.1 The Impact of an Increase in the Price Level on the Economy–Assuming No Changes in G, T, and Ms
DERIVING THE AGGREGATE DEMAND CURVE
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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
THE AGGREGATE DEMAND CURVE
aggregate demand curve (AD) A curve that shows the negative relationship between aggregate output (income) and the price level. Each point on the AD curve is a point at which both the goods market and the money market are in equilibrium.
Each pair of values of P and Y on the aggregate demand curve corresponds to a pointat which both the goods market and the money market are in equilibrium.
DERIVING THE AGGREGATE DEMAND CURVE
An increase in the price level causes the level of aggregate output (income) to fall.
A decrease in the price level causes the level of aggregate output (income) to rise.
FIGURE 13.2 The Aggregate Demand (AD) curve
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THE AGGREGATE DEMAND CURVE
THE AGGREGATE DEMAND CURVE: A WARNING
Aggregate demand falls when the price level increases because the higher price level causes the demand for money (Md) to rise. With the money supply constant, the interest rate will rise to reestablish equilibrium in the money market. It is the higher interest rate that causes aggregate output to fall.
The AD curve is not the sum of all the market demand curves in the economy. It is not a market demand curve.
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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
THE AGGREGATE DEMAND CURVE
OTHER REASONS FOR A DOWNWARD-SLOPING AGGREGATE DEMAND CURVE
Planned investment does not bear all the burden of providing the link from a higher interest rate to a lower level of aggregate output. Decreased consumption brought about by a higher interest rate also contributes to this effect.
An increase in the price level lowers the real value of some types of wealth.
The Consumption Link
The Real Wealth Effect
real wealth, or real balance, effect The changein consumption brought about by a change in real wealth that results from a change in the price level.
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THE AGGREGATE DEMAND CURVE
AGGREGATE EXPENDITURE AND AGGREGATE DEMAND
At every point along the aggregate demand curve, the aggregate quantity demanded is exactly equal to planned aggregate expenditure, C + I + G.
equilibrium condition: C + I + G = Y
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THE AGGREGATE DEMAND CURVE
SHIFTS OF THE AGGREGATE DEMANDAn increase in the quantity of money supplied at a given price level shifts the aggregate demand curve to the right.
An increase in government purchases or a decrease in net taxes shifts the aggregate demand curve to the right.
FIGURE 13.3 The Impact of an Increase in the Money Supply on the AD Curve
FIGURE 13.4 The Effect of an Increase in Government Purchases or a Decrease in Net Taxes on the AD Curve
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THE AGGREGATE DEMAND CURVE
SHIFTS OF THE AGGREGATE DEMAND
FIGURE 13.5 Factors That Shift the Aggregate Demand Curve
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THE AGGREGATE SUPPLY CURVE
THE AGGREGATE SUPPLY CURVE: A WARNING
An “aggregate supply curve” in the traditional sense of the word supply does not exist. What does exist is what we might call a “price/output response” curve—a curve that traces out the price decisions and output decisions of all the markets and firms in the economy under a given set of circumstances.
aggregate supply The total supply of all goods and services in an economy.
aggregate supply (AS) curve A graph that shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level.
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THE AGGREGATE SUPPLY CURVE
AGGREGATE SUPPLY IN THE SHORT RUN
Even if firms are not holding excess labor and capital, the economy may be operating below its capacity if there is cyclical unemployment.
An increase in aggregate demand when the economy is operating at low levels of output is likely to result in an increase in output with little or no increase in the overall price level. That is, the aggregate supply (price/output response) curve is likely to be fairly flat at low levels of aggregate output.
Capacity Constraints
Output Levels and Price/Output Responses
When the economy is producing at its maximum level of output—that is, at capacity— the aggregate supply curve becomes vertical.
FIGURE 13.6 The Short-Run Aggregate Supply Curve
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THE AGGREGATE SUPPLY CURVE
AGGREGATE SUPPLY IN THE SHORT RUN
If input prices changed at exactly the same rate as output prices, the AS curve would be vertical.
Wage rates may increase at exactly the same rate as the overall price level if the price level increase is fully anticipated.
Input prices—particularly wage rates—tend to lag behind increases in output prices for a variety of reasons.
The Response of Input Prices to Changes in the Overall Price Level
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THE AGGREGATE SUPPLY CURVE
cost shock, or supply shock A change in costs that shifts the aggregate supply (AS) curve.
SHIFTS OF THE AGGREGATE SUPPLY CURVE
FIGURE 13.7 Shifts of the Aggregate Supply Curve
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THE AGGREGATE SUPPLY CURVE
SHIFTS OF THE AGGREGATE SUPPLY CURVE
FIGURE 13.8 Factors That Shift the Aggregate Supply Curve
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THE EQUILIBRIUM PRICE LEVEL
equilibrium price level The price level at which the aggregate demand and aggregate supply curves intersect.
FIGURE 13.9 The Equilibrium Price Level
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THE LONG-RUN AGGREGATE SUPPLY CURVE
POTENTIAL GDP
If wage rates and other costs fully adjust to changes in prices in the long run, then the long-run AS curve is vertical.
potential output, or potential GDP The level of aggregate output that can be sustained in the long run without inflation.
FIGURE 13.9 The Long-Run Aggregate Supply Curve
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AGGREGATE DEMAND, AGGREGATE SUPPLY,AND MONETARY AND FISCAL POLICY
FIGURE 13.11 A Shift of the Aggregate Demand Curve When the Economy
Is on the Nearly Flat Part of the AS Curve
FIGURE 13.12 A Shift of the Aggregate Demand Curve When the Economy
Is Operating at or Near Maximum Capacity
LONG-RUN AGGREGATE SUPPLY AND POLICY EFFECTS
If the AS curve is vertical in the long run, neither monetary policy nor fiscal policy hasany effect on aggregate output in the long run.
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CAUSES OF INFLATION
INFLATION VERSUS SUSTAINED INFLATION: A REMINDER
inflation An increase in the overall price level.
sustained inflation Occurs when the overall price level continues to rise over some fairly long period of time.
DEMAND PULL INFLATION
demand-pull inflation Inflation that is initiated by an increase in aggregate demand.
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CAUSES OF INFLATION
COST-PUSH, OR SUPPLY-SIDE, INFLATION
cost-push, or supply-side, inflation Inflationcaused by an increase in costs.
stagflation Occurs when output is falling at the same time that prices are rising.
FIGURE 13.13 Cost-Push, or Supply-Side, Inflation
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CAUSES OF INFLATION
EXPECTATIONS AND INFLATION
FIGURE 13.14 Cost Shocks Are Bad News for Policy Makers
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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
CAUSES OF INFLATION
MONEY AND INFLATION
FIGURE 13.15 Sustained Inflation from an Initial Increase in G and Fed Accommodation
hyperinflation A period of very rapid increases in the price level
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aggregate demandaggregate demand (AD) curveaggregate supplyaggregate supply (AS) curvecost-push, or supply-side, inflationcost shock, or supply shockdemand-pull inflation
REVIEW TERMS AND CONCEPTS
equilibrium price levelhyperinflationinflationinflationary gappotential output, or potential GDPreal wealth, or real balance, effectstagflationsustained inflation