ECON CH 9 Aggregate Demand & Supply PDF

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CHAPTER 9:AGGREGATE DEMAND (AD): Relationship bt/w real GDP & price level Downward slope ↑ Output = ↓ Price ↓ Output = ↑ Price WHY AD CURVE IS NEGATIVELY SLOPED: ***** Movement ALONG AD curve!!!!! ***** 1.) WEALTH EFFECT: - Households hold some of their wealth in financial assets ● Savings a...

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CHAPTER 9: AGGREGATE DEMAND (AD): - Relationship bt/w real GDP & price level - Downward slope - ↑ Output = ↓ Price - ↓ Output = ↑ Price WHY AD CURVE IS NEGATIVELY SLOPED: ***** Movement ALONG AD curve!!!!! ***** 1.) WEALTH EFFECT: - Households hold some of their wealth in financial assets ● Savings accounts ● Bonds ● cash - ↑ Aggregate Price Level = ↓ Purchasing Power of monetary wealth = ↓ Output Demanded 2.) EXPORT PRICE EFFECT: - ↑ Aggregate Price Level = more expensive American goods in global marketplace = foreigners purchases fewer American goods = ↓ Exports = ↓ Demand for Domestically produced goods/services - Mitigated by Flexible Exchange Rates: ● If US dollar depreciates due to inflation = American goods are less expensive in other countries = ↑ US exports 3.) INTEREST RATE EFFECT: - Interest Rate: ● Price paid for the use of money - ↑ Aggregate Price Level = people need more money to carry out economic transactions = ↑ Interest Rates = ↓ Business Investment = ↓ QD for real GDP

DETERMINANTS OF AGGREGATE DEMAND: ***** Shift ENTIRE AD curve!!!! ***** 1.) CONSUMER SPENDING: ● Largest component of AD ● 68% of total spending in economy ● Level of spending as % of overall output = relatively stable over time ● AFFECTED BY: 1.) Wealth ● ↑ Wealth = ↑ Spending = ↑ AD 2.) Consumer confidence ● ↑ Confidence = ↑ Spending = ↑ AD 3.) Household debt ● ↑ Debt = ↓ Spending = ↓ AD 4.) Interest rates ● ↑ Interest Rate = ↓ Spending = ↓ AD - Makes purchasing more difficult 5.) Taxes ● ↑ Taxes = ↓ Spending = ↓ AD 2.) INVESTMENT: ● Spending mostly by businesses for: - Structures - Equipment - Software ● Determined by: 1.) Interest rates 2.) Expected rate of return on capital projects ● ↑ Interest Rates = ↓ Investment = ↓ AD ● ↓ Interest Rates = ↑ Investment = ↑ AD

3.) GOVERNMENT SPENDING & NET EXPORTS: ● Same effect as consumer spending - ↑ gov’t spending/exports = ↑ AD - ↓ gov’t spending/exports = ↓ AD ● ↑ National Income In foreign country/tourism = ↑ D for American goods in other countries = ↑ Exports = ↑ AD (US)

AGGREGATE SUPPLY (AS): - Real GDP produced @ various price levels - Production side of economy - SHORT-RUN (SRAS): ● ↑ Price Level = ↑ AS ● Upward Sloping - LONG-RUN (LRAS): ● Measures economy @ its potential output w/ full employment ● Vertical curve ● Growth in Economy = LRAS Shifts RIGHT LONG-RUN AGGREGATE SUPPLY (LRAS): - Assumes all variables are adjustable in long-run ● Product prices, wages, & interest rates = flexible - Economy gravitates towards full employment (Q0) - Minimal inflationary prices - Full employment capacity of economy - Depends on: 1.) Amount of resources 2.) Technology

DETERMINANTS OF LRAS: ***** shift ENTIRE curve ***** - Productive Capacity depends on: 1.) Capital available 2.) Size & quality of labor force 3.) Technology employed SHORT-RUN AGGREGATE SUPPLY (SRAS): - Relationship bt/w aggregate price level & aggregate output - Input prices = STICKY ● Slow to change ● REASONS: 1.) Contracts 2.) Underutilization of resources

DETERMINANTS OF SRAS: ***** shift ENTIRE curve ***** 1.) INPUT PRICES: ● ↓ Input Prices = ↑ Output = ↑ AS 2.) PRODUCTIVITY: ● ↑ Productivity = ↑ Output = ↑ AS 3.) TAXES & REGULATION: ● ↑ Taxes/Regulation = ↑ Production Costs = ↓ AS 4.) MARKET POWER OF FIRMS: ● ↓ Market Power = ↓ Ability to ↑ Prices = ↑ AS 5.) INFLATIONARY EXPECTATIONS: ● Expect Future ↑ Inflation = ↑ Bargaining for Higher Wages = ↓ AS

MACROECONOMIC EQUILIBRIUM: - Occurs @ intersection on SRAS & AS curves - Output level where there are NO pressures for economy to expand or contract - Qf: ● Full employment output ● Natural rate of unemployment - Point e: ● Long-Run Macroeconomic Equilibrium

SPENDING MULTIPLIER: - John Maynard Keynes in 1936 - Central Idea: ● New spending creates more spending, income, & output than amount equal to the new spending itself - Assumes aggregate price level = stable - (1) / (1-MPC) = (1) / (MPS) - PORTION OF ADDITIONAL INCOME THAT CONSUMER SPEND & SAVE: 1.) MARGINAL PROPENSITY TO CONSUME: ● MPC 2.) MARGINAL PROPENSITY TO SAVE: ● MPS

DEMAND-PULL INFLATION: - AD expands so much that equilibrium output exceeds full employment output

COST-PUSH INFLATION: - Supply shock hits economy ● Shifts SRAS curve left

FORMULAS: -

SPENDING MULTIPLIER = (1) / (1-MPC) = (1) / (MPS)

QUIZZES/VIDEOS: - https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/nationalincome-and-price-determinations -

https://mru.org/practice-questions/solow-model-1-%E2%80%93-introduction-practicequestions

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https://mru.org/node/332641/done?sid=3456788

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https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/apfinancial-sector/the-money-market-apmacro/v/demand-curve-for-money-in-the-moneymarket-ap-macroeconomics-khan-academy

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