Economic Fluctuations
description
Transcript of Economic Fluctuations
![Page 1: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/1.jpg)
Economic Fluctuations
It’s a recession when your neighbor loses his job, it’s a depression when you lose yours.
Harry Truman
![Page 2: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/2.jpg)
Learning Objectives:
Learn about aggregate demand and the factors that will affect it
Analyze aggregate supply and the factors that influence it
Study the economy’s equilibrium and how it differs from its potential
Examine Canada’s historical record of economic growth.
![Page 3: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/3.jpg)
What determines the
connections among
inflation, unemployment,
and levels of spending and
real output in the Canadian
economy?
![Page 4: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/4.jpg)
Answer:
In the economy as a whole, we see the relationship between the general price level and total spending in the economy, which is known as :
Aggregate Demand
![Page 5: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/5.jpg)
Aggregate Demand Curve
Relationship between the general price level and total spending in the economy expressed on a graph.
0 650 700 750 800
40
80
120
160
200
Aggregate Demand Curve
Real GDP (1997 $ billions)
Pric
e Le
vel (
GD
P de
flato
r,19
97 =
100
)
Aggregate DemandSchedule
PriceLevel
Real GDP(1997,
$ billions)
Point onGraph
200160120
650700750
abc
a
b
cAD
![Page 6: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/6.jpg)
Curve Continued….Two factors cause the aggregate demand
curve to be downward sloping:
The wealth effect that higher prices decrease the real value of financial assets and decrease consumption, since households feel poorer than normal.
The foreign trade effect means that higher prices decrease exports and increase imports.
![Page 7: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/7.jpg)
What causes changes to the aggregate demand??
Remember spending has 4 components:
CONSUMPTION INVESTMENTGOVERNMENT PURCHASESNET EXPORTS
An increase in spending causes a rightward shift in the curve
A decrease in spending causes a leftward shift in the curve
![Page 8: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/8.jpg)
CONSUMPTION
Disposable Income:Consumer spending is the most significant determinant of disposable income in the entire economy. The economy’s DI changes as a result of population changes, as well as DI/household. Therefore, when DI rises, then there is a rise on consumer spending, adding to total expenditures, and shifting the aggregate demand curve to the right. Wealth:Consists of real (houses and appliances )and financial assets (stocks and bonds). Eg: if the stock prices increase, a person owning some stocks is going to experience a real gain in wealth, resulting in a greater likelihood of spending more of their disposable income. Aggregate demand will increase, and the curve will shift to the right. Consumer Expectations:Consumer expectations influence the demand for products. If there is higher consumer spending then the aggregate demand increases, and aggregate demand curve shifts to the right.Interest Rates:People often buy durable goods, such as cars and furniture, if the real interest rate falls, consumers are more likely to borrow to pay for big items. Consumer spending rises and the Aggregate demand curve shifts to the right.
![Page 9: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/9.jpg)
INVESTMENT
In the investment demand curve, it’s the relationship between the interest rate and investment and depends on the real rate of return and the real interest rate
Business Expectations: If businesses anticipate that profits will increase, the investment demand curve shifts to the right, thereby causing an increase in the aggregate demand.
0
Investment Demand Curve
Investment (1997 $ billions)
Rea
l Rat
e of
Ret
urn
and
Rea
l Int
eres
t Rat
e (%
)
30 60
4
8
12
A B C D
a
b
cD1
Investment Demand ScheduleReal
InterestRate(%)
TotalInvestment
(1997 $ billions)
Point onGraph
ProjectsUndertaken
1284
03060
abc
--A, B
A, B, C, D
![Page 10: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/10.jpg)
Government purchases
Net Exports
If a rise occurs in Government purchases
Eg: Highway Construction
Aggregate Demand increases
Foreign IncomesIf incomes increase in foreign countries, then its likely that the citizens of that country will purchase more products as a result – their own and those from other countries. Canadian exports increase, thereby increasing Canada’s aggregate demand.
Exchange Rates It’s the value of one nation’s currency in terms of another currency. The impact of exchange rates on prices, are if the Canadian dollar increases in value, then the net exports fall causing aggregate demand to decrease.While the reverse occurs, when the Canadian dollar drops in value then the net exports rise increasing aggregate demand.
![Page 11: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/11.jpg)
Brief Summary
Aggregate demand is the relationship between the price level and the total spending
Changes in the Aggregate Demand are caused by:
ConsumptionInvestment
Government PurchasesNet Exports.
![Page 12: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/12.jpg)
Economic Fluctuation
Part 2Aggregate Supply
![Page 13: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/13.jpg)
Review
-Wealth effect:when the price decrease,household feel richer,then they may buy more,the consumption will increase
-Foreign trade effect: lower prices-->increase exports-->decrease imports -Aggregate Demand : the relationship between
general price level and total spending in the economy -Aggregate demand factors:C+I+G+Nx = GDPConsumption:Disposable income,Wealth,Consumer
expectation,Interest RentInvestment:interest rate,business expectationsGovernment PurchaseNet Exports:foreign incomes,exchange rate
![Page 14: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/14.jpg)
Aggregate Supply
Aggregate Supply: the relationship between price level and real output in the economy
Aggregate Supply Curve :The slope of the total supply curve is upward sloping
![Page 15: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/15.jpg)
Factors that can change in Aggregate Supply Curve
In Short run(potential output stays constant) :
-Input price
0 750 775 800 900
40
80
120
160
240
Aggregate Supply Curve
Real GDP (2007 $ billions)
Pric
e Le
vel (
GD
P d
efla
tor,
1997
= 1
00)
200
850825
a
b
c
dAS
PotentialOutput
![Page 16: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/16.jpg)
Factors that can change in Aggregate Supply Curve
In Long run(potential output is variable):-Resources supplies-Productivity-Government policies
0 650 675 700 800
40
80
120
160
240
Aggregate Supply Curve
Real GDP (1993 $ billions)
Pric
e Le
vel (
GD
P d
efla
tor,
1997
= 1
00)
200
750725
NewPotentialOutput
OriginalPotentialOutput
AS0 AS1
![Page 17: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/17.jpg)
Shifting to Rightward
In short run:- a fall in wages- a fall in raw material prices
In Long run:- more labour supply,capital
stock,land,entrepreneurship- an increase in productivity- lower taxes- less government regulation
![Page 18: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/18.jpg)
Shifting to leftward
In Short run:-a rise in wages-a rise in raw material prices
In Long run:- less labour supply,capital
stock,land,entrepreneurship- a decrease in productivity- higher taxes- more government regulation
![Page 19: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/19.jpg)
Part 3 Aggregate Demand and Supply
![Page 20: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/20.jpg)
Aggregate Demand and Supply
- Inventory Changes- Results of an inventory increase- Results of an inventory decrease- The role of unplanned investment
![Page 21: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/21.jpg)
Injections and withdrawals
- Investment and Saving- Government purchases and taxes- Exports and Imports- Total injections and withdrawals
![Page 22: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/22.jpg)
Recessionary Gaps Inflationary Gaps
Equilibrium versus Potential Output
![Page 23: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/23.jpg)
Labour productivity
![Page 24: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/24.jpg)
Business cycles
![Page 25: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/25.jpg)
Definitions
Expansion: A sustained rise in the real output of an economy
Contraction: A sustained fall in the real output of an economy
Business cycle: The cycle of expansions and contractions in the economy
Peak: The point in the business cycle at which real output is at its highest
![Page 26: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/26.jpg)
Effects of a contractionRecessions and Depressions
Recessions: A decline in real output that lasts for six months or more
Depression: A particularly long and harsh period of reduced real output
Trough: The point in the business cycle at which real output is at its lowest
![Page 27: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/27.jpg)
The highest output occurs at a peak in the business cycle. From this point, the economy contracts, so aggregate demand decreases. Consumer and business expectations magnify the downward trend.
The lowest output occurs in a trough in a business cycle. From this point, the economy expands, so aggregate demand increases. Expectations magnify the upward trend.
![Page 28: Economic Fluctuations](https://reader035.fdocuments.in/reader035/viewer/2022062811/56816180550346895dd1110a/html5/thumbnails/28.jpg)
--- THE END---