Post on 28-Dec-2015
Shifters of Aggregate Demand
Change in Consumer Spending
Change in Investment Spending
Change in Government Spending
Net EXport Spending
AD = C + I + G + X
Shifters of Aggregate SupplyAS = R + A + P
Change in Resource Prices
Change in Actions of the Government
Change in Productivity
2
Price Level
4
AD
AS
GDPRQY
PLe
LRAS
Use the AD and AS model to show an economy at full employment output
Price Level
5
AD
AS
#1. Assume there is an increase in consumer spending. What happens to PL and output in the
short- run?
GDPR
LRAS
QY
AD1
PLe
PL1
Q1
PL and Q will Increase
Practice1. An increase in consumer spending2. The impact on net exports when a trading partner has a recession3. A significant increase in the price of oil that affects the resource costs of businesses4. Government increases spending but not taxes5. Increase in wages that businesses pay workers 6. Effect on businesses when they expect inflation7. Effect on investment when interest rates decrease 8. An increase in productivity9. The impact on next exports when the country’s currency depreciates10. Government increases corporate taxes
7
Ca
pit
al G
oo
ds
Consumer Goods
The economy can only be in one of three places at any time
8
Full Employment5% Unemployment
Max Capacity0% Unemployment
Time
Real GDP
Real GDP
Recessionary GapFull EmploymentInflationary Gap
Price Level
9
AD
AS
Example: Assume the government increases spending. What happens to PL and Output?
GDPR
LRAS
QY
AD1
PLe
PL1
Q1
PL and Q will Increase
Price Level
10
AS
Inflationary Gap
GDPR
LRAS
QY
AD1
PL1
Q1
Output is high and unemployment is less than NRU
Actual GDP above potential
GDP
Price Level
11
AD
AS
GDPRQY
PLe
PL1
Q1
LRAS
AD1
Example: Assume consumer spending falls. What happens to PL and Output?
PL and Q will decrease
Price Level
12
AS
GDPRQY
PL1
Q1
LRAS
AD1
Actual GDP below potential
GDP
Recessionary Gap
Output low and unemployment is more than NRU
Price Level
13
AD
AS
GDPRQY
PLe
PL1
Q1
LRAS AS1
StagflationStagnate Economy
+ Inflation
Example: If there is a negative “supply shock” of oil. What happens to PL and Output?
Still considered recessionary gap
15
AD
AS
If consumer spending increases, what will happen in the short-run and in the long-run?
GDPRQY
AD1
PLe
PL1
Q1
LRAS
In the long-run, wages and costs increase
AS1
PL2
Time
Real GDP
PriceLevel
Real GDP
16
If consumer spending increases, what will happen in the short-run and in the long-run?
GDPRQY
AD1
LRAS
In the long-run, wages and costs increase
AS1
PLe
Time
Real GDP
PriceLevel
Real GDP
17
AD
AS
If consumer spending decreases, what will happen in the short-run and in the long-run?
GDPRQY
AD2
PLe
PL1
Q1
LRAS
In the long-run, wages & costs eventually decrease
AS2
PL2
Time
Real GDP
PriceLevel
Real GDP
18
AD
AS
If investment increases, what happens in the short-run and long-run?
GDPRQY
AD1
PLe
PL1
Q1
LRAS
Capital Stock- Machinery and tools purchased by businesses that increase their output
AS1
PriceLevel
Ca
pit
al G
oo
ds
Consumer Goods
The PPC shifts outward since producers can make more
LRAS1
QY1