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Aggregate DemandAggregate
Demand
•^
The world economy influences aggregated
d i
t
demand in two ways:– A fall in the foreign exchange rate lowers the price of
domestic goods and services relative to foreign goodsdomestic goods and services relative to foreign goodsand services, increases exports, decreases imports,and increases aggregate demand.
- An increase in foreign income increases the demand
for U.S. exports and increases aggregate demand.
Aggregate DemandAggregate Demand
•^
Figure 7 illustrates
g changes in aggregatedemand.
-^
When aggregatedemand increases, the AD
curve shifts AD
curve shifts rightward…
-^
… and when aggregate… and when aggregatedemand decreases, the AD
curve shifts leftward.
Short-Run Macroeconomic EquilibriumShort Run Macroeconomic Equilibrium
Short-run macroeconomic equilibrium
occurs
when the quantity of real GDP demanded equalsthe quantity of real GDP supplied at the point ofi t
ti
f th
AD
d th
SAS
intersection of the
AD
curve and the
SAS
curve.
Macroeconomic EquilibriumMacroeconomic Equilibrium
•^
Figure 8 illustrates a
g short-run equilibrium.
-^
If real GDP is below equilibrium GDP, firmsincrease production andraise pricesraise prices…
-^
… and if real GDP isabove equilibrium GDP,above equilibrium GDP,firms decreaseproduction and lower
iices.
Macroeconomic EquilibriumMacroeconomic
Equilibrium
•^
These changes bring amovement along the
SAS
t^
d^
ilib i
curve toward equilibrium.
-^
In short-run equilibrium,real GDP can be greaterreal GDP can be greaterthan or less thanpotential GDP.
Long-Run Macroeconomic EquilibriumLong Run Macroeconomic Equilibrium
Long
-run macroeconomic equilibrium
occurs
Long run macroeconomic equilibrium
occurs
when real GDP equals potential GDP—when the
economy is on its
LAS
curve.
Macroeconomic EquilibriumMacroeconomic Equilibrium
•^
Figure 9 illustrates long-
g^
g
run equilibrium.
-^
Long-run equilibriumoccurs where the
AD
and
LAS
curves intersect and
LAS
curves intersect and
results when the nominalwage has adjusted to putthe
SAS
curve through
the
SAS
curve through
the long-run equilibriumpoint.
Economic Growth and InflationEconomic Growth and Inflation
•^
Figure 10 illustrateseconomic growth andinflation.
Macroeconomic EquilibriumMacroeconomic
Equilibrium
•^
A
long-run equilibrium
is an
g
q
equilibrium in which potentialGDP equals real GDP.
-^
Figures 11(b) and (d)illustrate long-runillustrate long runequilibrium.
Macroeconomic EquilibriumMacroeconomic Equilibrium
•^
An
above full-employment
p
y
equilibrium
is an equilibrium
in which real GDP exceedspotential GDPpotential GDP.
-^
Figures 11(c) and (d)illustrate above fullillustrate above full-employment equilibrium.
-^
The amount by whichreal GDP exceedspotential GDP is called potential GDP is calledanNote: These lecture notes are incomplete without having attended lectures
inflationary gap
Macroeconomic EquilibriumMacroeconomic Equilibrium
•^
Figure 11(d) shows how, as
g^
the economy moves fromone type of short-runequilibrium to another realequilibrium to another, realGDP fluctuates aroundpotential GDP in a business cycle.
Fluctuations in Aggregate DemandFluctuations in Aggregate Demand
•^
Figure 12 shows the effects
g of an increase in aggregatedemand.
-^
Part (a) shows the short-run effects.
-^
Starting at long-runequilibrium, an increase in aggregate demand shiftsthe
AD
curve rightward.
Macroeconomic EquilibriumMacroeconomic
Equilibrium
•^
Firms increase production and raise prices—amovement along the
SAS
curvecurve
Macroeconomic EquilibriumMacroeconomic Equilibrium
•^
Figure 12(b) shows thelong-run effects.
-^
Real GDP increases, the
i^
l^
l^
i^
d i
th
price level rises, and in thenew short-run equilibrium,there is an inflationary gap.
Macroeconomic EquilibriumMacroeconomic Equilibrium
•^
The nominal wage rate
g
begins to rise and short-runaggregate supply begins todecrease.
-^
The
SAS
curve shifts
leftward.
-^
The price level rises and
-^
The price level rises andreal GDP decreases until ithas returned to potentialGDPGDP.
Fluctuations in Aggregate SupplyFluctuations in Aggregate Supply
•^
Figure 13 shows the
g effects of a decrease inaggregate supply.
-^
Starting at long-runequilibrium, a rise in theequilibrium, a rise in theprice of oil decreasesshort-run aggregatesupply and the
SAS
curve
supply and the
SAS
curve
shifts leftward.
U.S. Economic Growth, Inflation, and CyclesU.S.
Economic Growth, Inflation, and Cycles
•^
Economic Growth– Real GDP growth was rapid during the 1960s and
1990s and slower during the 1970s and 1980s.
•^
Inflation
Inflation was the most rapid during the 1970s
- Inflation was the most rapid during the 1970s. -^
Business CyclesBusiness Cycles– Recessions occurred during the mid-1970s, 1982,
1991–1992, and 2001.
