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![Page 1: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/1.jpg)
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 08Aggregate
Demand and Aggregate
Supply
![Page 2: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/2.jpg)
1-2©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-2
Chapter Outline• Aggregate Demand• Aggregate Supply• Shifts in Aggregate Demand
and Aggregate Supply• Causes of Inflation• Supply-Side Economics• How the Government Can
Influence (but probably not control) the Economy
![Page 3: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/3.jpg)
1-3©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-3
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
![Page 4: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/4.jpg)
1-4©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-4
Figure 1 Aggregate Demand
RGDP
PI
AD
![Page 5: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/5.jpg)
1-5©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-5
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
![Page 6: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/6.jpg)
1-6©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-6
Aggregate Supply
• Aggregate Supply: the level of real domestic output available at each possible price level
![Page 7: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/7.jpg)
1-7©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-7
Figure 2 The Aggregate Supply Curve
RGDP
PI
Keynesian Range
Classical Range
Intermediate Range
AS
![Page 8: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/8.jpg)
1-8©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-8
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.
![Page 9: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/9.jpg)
1-9©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-9
Variables that Shift Aggregate Demand
• Taxes• Interest Rates• Confidence• Strength of the Dollar• Government Spending
![Page 10: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/10.jpg)
1-10©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-10
Determinants of ADVariable GDP
Component C,I,G,X
Effect of an increase on AD
Effect of a decrease on AD
Taxes C,I Decrease soAD <=
Increase soAD =>
Interest Rates
C,I Decrease soAD <=
Increase soAD =>
Confidence C,I Increase soAD =>
Decrease soAD <=
Strength of the Dollar
X (exports-imports)
Decrease soAD <=
Increase soAD =>
Government Spending
G Increase soAD =>
Decrease soAD <=
![Page 11: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/11.jpg)
1-11©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-11
Figure 3 AD Increases
AD’
AS
AD
RGDP
PI
PI*
RGDP*
PI’
RGDP’
![Page 12: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/12.jpg)
1-12©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-12
Figure 4 AD Decreases
AD’
AS
AD
RGDP
PI
PI*
RGDP*
PI’
RGDP’
![Page 13: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/13.jpg)
1-13©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-13
Variables that Shift AS
• Input Prices• Productivity• Government Regulation
![Page 14: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/14.jpg)
1-14©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-14
Determinants of AS
Variable Effect of an Increase on AS
Effect of an Decrease on AS
Input Prices Decrease soAS
Increase so AS
Productivity
Increase so AS
Decrease soAS
Government Regulation
Decrease soAS
Increase so AS
![Page 15: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/15.jpg)
1-15©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-15
Figure 5 Increase in AS
AS
AD
RGDP
PI
PI*
RGDP*
AS’
PI’
RGDP’
![Page 16: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/16.jpg)
1-16©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-16
Figure 6 Decrease in AS
RGDP
AS
AD
PI
PI*
RGDP*
AS’
PI’
RGDP’
![Page 17: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/17.jpg)
1-17©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-17
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
![Page 18: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/18.jpg)
1-18©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-18
Government Influence: Aggregate Demand
• Government can influence economic activity with aggregate demand side policies affecting:• Taxes• Government Spending• Interest Rates
![Page 19: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 08 Aggregate Demand and Aggregate Supply.](https://reader036.fdocuments.in/reader036/viewer/2022062511/551473d1550346b0158b51bf/html5/thumbnails/19.jpg)
1-19©2012 The McGraw-Hill Companies, All Rights Reserved McGraw-Hill/Irwin 8-19
Government Influence: Aggregate Supply
• Government can influence economic activity with aggregate supply side policies affecting• input costs (labor and wage)• reducing regulation• Increase incentives to • Work• Take Risks
• The actions are call Supply Side Economics