20120826 mankiw economics chapter33

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CH33 Aggregate Demand and Aggregate Supply

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Index

•  Long run and short run fluctuations

•  Demand curve in the short run

•  Supply curve in the short run

•  Two causes of economis fluctuations

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Index





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The realty of short-run fluctuationsin USA

In the short run,real and nominal variables are highly interwined,and changes in the money supply can temporarily push real GDP away from its long-run trend.

(a)Real GDP (b)investment spending (c)Unemployment rate

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The realty of short-run fluctuationsin Japan

%

10億円

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Three key facts about economic fluctuations

•  Fact1:Economic fluctuations are irregular and unpredictable

•  Fact2:Most macroeconmic quantities fluctuate together

•  Fact3:As output falls,unemployment rises

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The most important macro economic variables in the long run

Chap 25

Chap 26 Chap 27

Chap 28

Chap 29 Chap 30

the level and growth of productivity and real GDP

How the financial system works and How the real interest rate adjusts to balance saving and investment

Why there is always some unemployment in the economy

the monetary system and how changes inthe money supply affect the price level,the inflation rate, and the nominal interest rate

Chap 31 Chap 32

extention of this analysis to open economies to explain the trade balance and the exchange rate.

GDP

financial system

Unemployment

Monetary system

Open Economy

Chapter Key words Contens

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The classical dichotomy and monetary neutrality

The Classical dichomomy Monetary neutrality

・the separation of variables into real variables and nominal variables ・Changes in the money supply affect nominal variables but not real variables.

MacroEconomic Theory in the long-run (Chap25-32)

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Index





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The model of aggregate demandand aggregate supply

quantity of output

quantity of output

quantity of output

Price level

Price level

Price level

model of market demand and supply in microeconomics

model of aggregate demand and suppy in the long-run

model of aggregate demand and suppy in the short-run

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Why the aggregate-demand curve slopes down

quantity of output

Price level

•  The price level and consumption:The wealth effect –  Consumers are wealthier,which stimulates the demand for consumption goods.

•  The price level and investment:The interest rate effect –  Interest rates fall,the demand for investment goods.

•  The price level and net exports:The exchange rate effect –  The currency depreciates,which stimulates the demand for net exports.

Y=C+I+G+NX

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Why aggregate demand curve might shift

•  Shifts arising from changes in

demand factor more less

consumption a cut tax

a stock market booom

a tax hike

a stock market decline

investment optimism about future

a fall in interest rate

pessimism about future

a rise in interest rate

government purchases greater spending on defense or highway construction

a cutback in defense or high way spending

net exports

a boom overseas

speculation that causes an exchange-rate depriciation

a recession overseas

speculation that causes an exchange-rate appreciation

quantity of output

Price level

Y=C+I+G+NX

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Index





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Why the aggregate-supply curve is verticalin the long run

quantity of output

Price level P1

P2

1. A change in the price level...

2 does not affect the quantitiy of goods and services supplied in the long run.

Natural rate of output

In the long run, an economy's production of goods and services(its real GDP) depends on its supplies of labor,capital,and natural resources and on the available technology used to turn these factors of production into goods and services.

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Why the long run aggregate supply curve might shift


Supply factor more less

Labor increasing workers decreasing workes

Capital increse in the economy's capital stock

decrese in the economy's capital stock

Natural resources The discovery of new mineral A change in the availability of resources

Technological knowledge The invention of computers

opening up international trade

new regulations preventing firms from using some production methods

quantity of output

Price level


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Using aggregate demand and aggregate supply to depict long run growth and inflation

Price level

Quantity of output Y2000 Y2010 Y1990

P1990

P2000

P2010

1. In the long run,technological progress shifts long-run aggregate supply

2. and growth in the money supply shifts aggregate demand.

2. and growth in the money supply shifts aggregate demand.

4. and ongoing inflation

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Why does the short run aggregate supply curve slopes upward?

quantity of output

Price level

The sticky wage theory

The sticky price theory

The misperception theory

An unexpectedly low price raises the real wage,which causes firms to hire fewer workers and produce a smaller quantity of goods ans services.

An unexpectedly low price level leaves some firms with higher than desired prices,which depress their sales and leads them to cut back production.

An unexpectedly low price level leads some suppliers to think their relative prices have fallen,which induces a fall in production.

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Mathematical expression of Supply

Quantity of output supplied


Actual price level

Expected price level

= + a -

a number that determines how much output responds to unexpected changes in the price level.

Output deviates in the short run from its long run level(the natural rate) when the actual price level that people had expected to prevail.

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Why the short run aggregate supply curve might shift


Supply factor more less

Labor increasing workers decreasing workes

Capital increse in the economy's capital stock

decrese in the economy's capital stock

Natural resources The discovery of new mineral A change in the availability of resources

Technological knowledge The invention of computers

opening up international trade

new regulations preventing firms from using some production methods

quantity of output

Price level


Wages,prices,and perceptions are based on the expected price level.

So when people change their

expectations of the price level,the short run aggregate supply curve shift.

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Index





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Four steps for analyzing macroeconomic flucuations

Step1

Step2

Step3

Step4

Decide whether the event shifts the aggregate demand curve or the aggregate supply curve(or perhaps both)

Use the diagram of aggregate demand and aggregate supply to determine the impact on output and the price level in the short run.

Decide in which direction the curve shifts

Use the diagram of aggregate demand and aggregate supply to analyze how the economy moves from its new short run equilibrium to its long run equilibriu.

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A contraction in aggregate demand

P1

P2

P3

long run aggregate supply

Price level

Quantity of uotput

short run aggregate supply,AS1

AS2

Aggregate demand,AD1

AD2

A

B

C

3

4 2

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1. A decrease in aggregate demand 2. …cause output to fall in the short run 3. ...but over time,the short run aggregate supply curve shirt 4. ...and outputs returns to its natural rate

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Three important lessonsfrom shift in aggregate demand

•  In the short run,shifts in aggregate demand cause fluctuations in the economy's output of goods and services.

•  In the long run,shifts in aggregate demand affect the overrall price level but do not affect output.

•  Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

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[case study1]The great depression and world warⅡ

• Many economists place primary blame on the decline in the money supply. ü Fed's failure,banking system.

• Other economists fave suggested alternative reasons for the collapse in aggregate demand.

ü stock prices fell, financing distress • Government purchases of goods and services increased almost fivefold from 1939 to 1944.

ü devoting more resource to the military

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[case study2]The recession of 2008-2009

Back ground

After bubble bursting

Government Policy

・Fed's lowered interest rates to historically low levels. ・Substantial boom in the housing market. ・Development of securitization.

・Home owners were underwater. ・Various financial institutionsuffered from huge loss. ・The economy experienced a large contractionary shift inaggregate demand.

･Fed cut its target for the federal funds rate from. ・Congress appropriateed ＄700 billion for the Treasury to use to rescue the financial system. ・Large increase in government spending.

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The effect of a shift in aggregate supply long run aggregate supply

Short run aggreagte suppply,

AS1

P1

P2

Price level

A

B

AS2

Y1 Y2 long run aggregate supply

Short run aggreagte suppply,

AS1

P1

P2

Price level

A

B

AS2

Y1

aggreagte demand

aggreagte demand、AD1

AD2

1.An adverse shift in the short run aggregate supply curve

3...which causes the price level to rise further

2....policy maker can accomodate the shift by expanding aggregate demad

4...but keep output at its natural rate.

P3

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Two important lessonsfrom shift in aggregate demand

•  Shifts in aggregate supply can cause stagflation- a combination of recession(falling output) and inflation(rising prices.)

•  Policy makers who can influence aggregate demand can potentially mitigate the adverse impact on output but only at the cost of exacerbating the problem of inflation.

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[case study3]Oil and Economy

mid-1970s

the late 1970s

In 1986

OPEC attempted to thwart competition and reduce production to raise prices.

・The OPEC countries again restricted the supply of oil to raise the price.

・Squabbling broke out among members of OPEC. ・Member countries reneged on their agreements to restrict oil production.

Recently Conservation efforts and changes in technology have reduced the economy's dependence on oil.

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EOF

20120826 mankiw economics chapter33

Economy & Finance

Transcript of 20120826 mankiw economics chapter33