spending and total expenditures
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Spending and Total Expenditures. Aggregate Demand The total of all planned expenditures in the economy Aggregate Supply The total of all planned production in the economy. Spending and Total Expenditures. Questions - PowerPoint PPT PresentationTRANSCRIPT
Slide 10-1
Spending and Total Expenditures
Aggregate Demand
– The total of all planned expenditures in the economy
Aggregate Supply
– The total of all planned production in the economy
Slide 10-2
Spending and Total Expenditures
Questions
– What determines the total amount that individuals, governments, firms, and foreigners want to spend?
– What determines the equilibrium price level?
Slide 10-3
The Aggregate Demand Curve
Aggregate Demand Curve
– A curve showing planned purchase rates for all goods and services in the economy at various price levels, all other things held constant
Aggregate demand = C + I + G + X
Slide 10-4
The Aggregate Demand Curve
Real GDP per Year($ trillions)
Pric
e Le
vel
8 90
120
AD
100
140
6 7 11 1210
A
As the price levelrises, real GDPdemand declines
Slide 10-5
The Aggregate Demand Curve
Real GDP per Year($ trillions)
Pric
e Le
vel
8 90
120
AD
A100
140
6 7 11 1210
B
Slide 10-6
The Aggregate Demand Curve
Real GDP per Year($ trillions)
Pric
e Le
vel
8 90
120
AD
A100
140
6 7 11 1210
B
C
Figure 10-4
Slide 10-7
The Aggregate Demand Curve
What happens when the price level rises?
– The Real-Balance Effect (wealth effect)
– The Interest Rate Effect
– The Open Economy Effect
Slide 10-8
The Aggregate Demand Curve
The Real-Balance Effect
– The change in the real value of money balances when the price level changes
Slide 10-9
The Aggregate Demand Curve
The Interest Rate Effect
– Higher price levels indirectly increase the interest rate.
Slide 10-10
The Aggregate Demand Curve
The Open Economy Effect
– Higher price levels result in foreigners’ desiring to buy fewer American-made goods while Americans desire more foreign-made goods (i.e., net exports fall).
Slide 10-11
Aggregate Demand versus Demand for a Single Good
When the aggregate demand curve is derived, we are looking at the entire circular flow of income and product.
When a demand curve is derived, we are looking at a single product in one market only.
Slide 10-12
Shifts in the Aggregate Demand Curve
Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right.
Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.
Slide 10-13
Shifts in the Aggregate Demand Curve
Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right.
Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.
Slide 10-14
Factors Increasing Aggregate Demand
A drop in the foreign exchange value of the dollar
Increased security about jobs and future income
Improvements in economic conditions in other countries
A reduction in real interest rates (nominal interest rates corrected for inflation) not due to price level changes
Tax decreases
An increase in the amount of money in circulation
Slide 10-15
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Slide 10-16
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Slide 10-17
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD1AD
Increase in aggregate demand
Slide 10-18
Factors Decreasing Aggregate Demand
A rise in the foreign exchange value of the dollar
Decreased security about jobs and future income
Declines in economic conditions in other countries
A rise in real interest rates (nominal interest rates corrected for inflation) not due to price level changes
Tax increases
A decrease in the amount of money in circulation
Slide 10-19
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Slide 10-20
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Slide 10-21
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Decrease in aggregate demand
AD1
Slide 10-22
The Aggregate Supply Curve
The Long-Run Aggregate Supply Curve
– Real output at full employment
– A vertical line representing real output based on full information and after full adjustment has occurred
Slide 10-23
Long-Run Equilibrium and the Price Level
Figure 10-5
Slide 10-24
Long-Run Equilibrium and the Price Level
Long-run equilibrium occurs at the intersection of the LRAS curve and the AD curve
– Equilibrium price level is determined
– Planned real expenditures for the economy are equal to total planned production along the economy’s trends growth path
Slide 10-25
The Effects of Economic Growth on the Price Level
Figure 10-6, Panel (a)
Slide 10-26
The Effects of Economic Growth on the Price Level
Figure 10-6, Panel (b)
Slide 10-27
The Effects of Economic Growth on the Price Level
Secular Deflation– An increase in LRAS will, ceteris paribus,
result in a decrease in the price level.
Avoiding Secular Deflation– If the AD curve shifts outward by the same
amount as the LRAS curve,the price level remains constant.
– The AD curve can be shifted outward by increasing the money supply.
Slide 10-28
Inflation Rates in the United States
Figure 10-7Source: Economic Report of the President;
Economic Indicators, various issues
Slide 10-29
Causes of Inflation:Supply-Side Inflation
Figure 10-8, Panel (a)
• When LRAS1 shifts to LRAS2, the price level rises from 120 to 140
• Inflation is caused by a decrease in LRAS.
Slide 10-30
Causes of Inflation:Demand-Side Inflation
Figure 10-8, Panel (b)
An increase in AD from AD1 to AD2 causes the price level to rise from 120 to 140. An increase in AD causes inflation.
Slide 10-31
Causes of Inflation:Economic Growth and Inflation
Figure 10-9Source: Economic Report of the President;
Economic Indicators, various issues