TAILIEUCHUNG - Lecture Issues in economics today - Chapter 8: Aggregate demand and aggregate supply

When you finish this chapter, you should: Apply and manipulate the aggregate supply and aggregate demand model of macroeconomics, explain why the aggregate demand curve is downward-sloping and why there is controversy over the shape of the aggregate supply curve, list the variables that shift these curves and understand how the shifting translates into price and output impacts, discriminate between demand-pull and cost-push inflation, summarize what is meant by supply-side economics. | Chapter 8 Aggregate Demand and Aggregate Supply Chapter Outline Aggregate Demand Aggregate Supply Shifts in Aggregate Demand and Aggregate Supply Causes of Inflation Supply-Side Economics Aggregate Demand Aggregate Demand: the amounts of real domestic output which domestic consumers, businesses, governments, and foreign buyers collectively will desire to purchase at each possible price level Figure 1 Aggregate Demand RGDP PI AD Why Aggregate Demand is Downward Sloping Real Balances Effect Because higher prices reduce real spending power, prices and output are negatively related. Foreign Purchases Effect When domestic prices are high, we will export less to foreign buyers and we will import more from foreign producers. Therefore higher prices leads to less domestic output. Interest Rate Effect higher prices lead to inflation which leads to less borrowing and a lowering of RGDP Aggregate Supply Aggregate Supply: the level of real domestic output available at each possible price level Figure 2 The Aggregate Supply Curve RGDP PI Keynesian Range Classical Range Intermediate Range The Ranges of AS Keynesian Range Large amounts of unemployment make it so that increases in aggregate demand have no affect on wages or prices. Classical Range Full employment makes it so that increases in aggregate demand only increase wages or prices. Intermediate Range Some sectors of the economy reach full employment more quickly than others. Variables that Shift Aggregate Demand Taxes Interest Rates Confidence Strength of the Dollar Government Spending Determinants of AD Variable GDP Component Affected C,I,G,X Effect of an increase on AD Effect of a decrease on AD Taxes C,I Decrease so AD Interest Rates C,I Decrease so AD Confidence C,I Increase so AD => Decrease so AD Government Spending G Increase so AD => Decrease so AD <= Figure 3 AD Increases AD’ AS AD RGDP PI PI* RGDP* PI’ RGDP’ Figure 4 AD Decreases AD’ AS AD RGDP PI PI* RGDP* PI’ RGDP’ Variables that Shift AS Input Prices Productivity Government Regulation Determinants of AS Variable Effect of an Increase on AS Effect of an Decrease on AS Input Prices Decrease so AS Increase so AS Productivity Increase so AS Decrease so AS Government Regulation Decrease so AS Increase so AS Figure 5 Increase in AS AS AD RGDP PI PI* RGDP* AS’ PI’ RGDP’ Figure 6 Decrease in AS RGDP AS AD PI PI* RGDP* AS’ PI’ RGDP’ Causes of Inflation Demand Pull Inflation: inflation caused by an increase in aggregate demand Cost Push Inflation: inflation caused by a decrease in aggregate supply Supply-Side Economics Supply-side economics: government policy intended to influence the economy via aggregate supply by lowering input costs and reducing regulation

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