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Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs.

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Presentation on theme: "Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs."— Presentation transcript:

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2 Aggregate Demand/Aggregate Supply The Alpha and Omega of Macroeconomics Graphs

3 Consumption Capital Production Possibilities Curve/Gross Domestic Product Connection.A.A 10 5 Assume this economy is fully employing all of its resources in the least costly way (Productive Efficiency) and chooses to produce at point A (Allocative Efficiency) Assume this economy can produce 5 Capital goods and services And 10 consumption goods and services Assume one capital G/S costs $5.00 and 1 consumption G/S costs $1.00 What is this economys GDP? 5 Capital G/S X $5.00 = $25.00 10 Consumption G/S x $1.00 = $10.00 GDP - $35.00 This GDP represents Full-Employment or Potential GDP. Real GDP Price Level LRAS $35 FE ***Point A on the PPC is the same thing as Full Employment Real GDP Represented by LRAS – only expressed In $$$$$$*** Aggregate Demand/Aggregate Supply

4 Price Level Real GDP FE RGDP LRAS 0 Between 0 and FE RGDP is a large range of Dollar value of GDP. EVERYONE of these Points to the LEFT of FE RGDP will represent RGDP values that are LESS than our Full-Employment POTENTIAL RGDP.

5 Price Level Real GDP FE RGDP LRAS 0 REMEMBER: To Calculate RGDP we take Nominal GDP (Price x Quantity) and factor out changes in Price relative to a base year.

6 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 This is ACTUAL RGDPThis is POTENTIAL RGDP

7 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 If the economy was producing this amount of RGDP relative to the FE RGDP it is in serious trouble. It is way inside its productive capacity. Resource prices (Input prices) and wage rates are going to be low because there is VERY high Unemployment and a high supply of unused resources (Inputs)

8 Price Level Real GDP FE RGDP LRAS RGDP 1 PL 1 RGDP2 If we move to the production of RGDP2 we can see the economy is using MORE of its slack resources to produce RGDP (Inputs AND people) BUT the Price Level is steady…This is because we STILL have relatively HIGH Unemployment and there is still enough slack resources to keep their prices Low.

9 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3 This will continue over a range of RGDP production…

10 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4 This will continue over a range of RGDP production until we come to this next important point…

11 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5 What we have constructed so far is a range of production of RGDP that the economy CAN produce, but is not desirable…In the LONG RUN we hope to be at FE RGDP, but because of the current conditions the economy, in the SHORT RUN, can produce any one of these RGDP levels

12 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5 Hence, we have ONE part of our SHORT RUN AGGREGATE SUPPLY CURVE---The Horizontal, or Keynesian, Range.

13 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5 This will continue over a range of RGDP production… UNTIL ….

14 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6 …We reach RGDP6…Notice that NOW the Price Level INCREASES to PL2…As we move closer to FE RGDP we are getting to LOWER levels of Unemployment and are using more input resources so now these limited resources are beginning to become MORE scarce. When inputs and wages start to rise, what happens to the Cost of Production?? INCREASES… PL 2

15 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 Producers need to get a higher price to reflect the increasing input costs. The Producers will INCREASE the Quantity Supplied of RGDP when the Price Level INCREASES… PL 2 PL3

16 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 RGDP8 PL 2 PL3 PL4 THIS POINT IS VERY IMPORTANT!!!!

17 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 RGDP8 PL 2 PL3 PL4 At this point, ACTUAL RGDP is EQUAL to POTENTIAL RGDP…This economys ability to Produce RGDP in the SHORT RUN is now EQUAL to the Economys ability to Product RGDP in the LONG-RUN…

18 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 RGDP8 RGDP9 PL 2 PL3 PL4 PL5 What about this NEXT point? Can our economy produce at this point?

19 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 RGDP8 RGDP9 PL 2 PL3 PL4 PL5 IN THE SHORT RUN it can, but it will NOT be sustainable…Now Unemployment is BELOW the Natural Rate of Unemployment and Inputs are very scarce. The pressure on wages will INCREASE. The economy is up against a wall. There will not be any increase in Quantity Supplied at this point.

20 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 RGDP8 RGDP9 PL 2 PL3 PL4 PL5 This Range of the SHORT RUN AGGREGATE SUPPLY CURVE is called the INTERMEDIATE RANGE…

21 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 RGDP8 RGDP9 PL 2 PL3 PL4 PL5 PL6 We have reach the END of this economys ability to Produce RGDP….The SHORT RUN AGGREGATE SUPPLY CURVE Becomes VERTICAL and Parallels the LRAS CURVE…

22 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 RGDP8 RGDP9 PL 2 PL3 PL4 PL5 PL6 PL7SRAS The VERTICAL RANGE of the SRAS Curve is called the Classical Range…More on what the Classical and Keynesian Range mean later…. Classical Range

23 Price Level Real GDP FE RGDP LRAS PL 1 RGDP 1 RGDP2RGDP3RGDP4RGDP5RGDP6RGDP7 RGDP8 RGDP9 PL 2 PL3 PL4 PL5 PL6 PL7SRAS Lets take away all the stuff and see what we are left with…. Classical Range

24 Price Level Real GDP FE RGDP LRAS SRAS This is how I like to represent the SUPPLY-SIDE of the Economy. There are 3 distinct sections to the SRAS curve and it extends beyond the LRAS curve and then becomes vertical again….This just shows that an economy CAN produce beyond it productive capacity, but does so at its peril…Now we will insert an Aggregate Demand Curve and start with serious analysis on the economy.

25 Aggregate Supply (AS) Shifters Changes in spending not caused by Price Level Changes in INPUT prices for land, labor, capital, and entrepreneurship THE FACTORS OF PRODUCTION 1. Before the Change 2. The change 3. After the change Change in Market Power (unions, presence of monopolies) 1. Before the Change 2. The change 3. After the change Change in Productivity 1. Before the Change 2. The change 3. After the change Change in Government policies – business taxes, subsudies, regulations Change in value of currency 1. Before the Change 2. The change 3. After the change Price Level GDP (AS)

26 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 Unions grow more aggressive; wage rate increases.

27 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 OPEC successfully increases oil price

28 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 Labor productivity increases dramatically

29 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 Giant natural gas discovery decreases energy prices.

30 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 Computer technology brings new levels of efficiency to industry.

31 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 Research shows that improved schools have increased the skills of American workers and managers.

32 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 Government increases regulation of industry to address pollution problem

33 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 The dollar depreciates in foreign exchange markets

34 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 President announces cuts in farm and business subsidies.

35 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 Business taxes fall.

36 Price Level Real GDP SRAS Aggregate Demand /Aggregate Supply SRAS 1 New low-cost means of extracting oil from shale is discovered

37 Introduction to Aggregate Demand AD GDP Price Level

38 AD GDP Price Level Why is Aggregate Demand Curve Downward Sloping 1.According to the AD curve, what is the relationship between Price Level and Real GDP? There is an inverse relationship; the lower the price level, the higher the Real GDP or real output.

39 AD GDP Price Level Why is Aggregate Demand Curve Downward Sloping Explain how each of the following effects helps explain why the AD curve is downward sloping? Interest Rate Effect A lower price level decreases the demand for money, which decreases the interest rate and increases investment and interest sensitive components of consumption and, therefore, Real GDP or real output.

40 AD GDP Price Level Why is Aggregate Demand Curve Downward Sloping Wealth Effect or Real Balance Effect As the price level falls, cash balances will buy more so people will spend more, thus increasing Real GDP or Real Output.

41 AD GDP Price Level Why is Aggregate Demand Curve Downward Sloping Net Export or International Trade Effect A lower U.S. price level means prices for goods produced in the U.S. are lower relative to the prices in foreign countries. Thus people will buy more U.S. produced goods and fewer foreign produced goods. This increases net exports, a component of GDP

42 Aggregate Demand (AD) Shifters Changes in spending not caused by Price Level 1. Before the Change 2. The change 3. After the change Change in Net Exports (Nx) caused by a change in national income abroad, or exchange rate of money 1. Before the Change 2. The change 3. After the change Change in Government (G) spending 1. Before the Change 2. The change 3. After the change Change in Investment (I) caused by a change in interest rates, profit expectations, business taxes, technology, or excess capacity 1. Before the Change 2. The change 3. After the change Change in consumer spending (C) caused by a change in wealth, expectations, indebtedness, personal taxes PlPl Price Level GDP (AD) PlPl Price Level GDP (AD) GDP (AD) Price Level GDP (AD) Price Level GDP (AD)

43 Bottom Line of Aggregate Demand (AD) Aggregate Demand is driven by the Components of GDP AD = C + I + G + N(x) When one of these variables change, either positively or negatively (increase or decrease), AD curve will move right or left

44 In the slides that follow, read the situation and determine if it causes an increase, decrease or no change in AD. DO NOT CLICK ON THE YELLOW BARS. They are hot linked and will take you to a different part of the PPT. Just choose in your mind the direction you think AD will shift

45 Increase AD Decrease AD No Change in AD Situation: Congress cuts taxes. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

46 Increase AD Decrease AD No Change in AD Situation: Investment spending decreases. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

47 Increase AD Decrease AD No Change in AD Situation: Government spending increases; President promises no tax increases. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

48 Increase AD Decrease AD No Change in AD Situation: Survey shows consumer confidence jumps. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

49 Increase AD Decrease AD No Change in AD Situation: Stock market collapses; investors lose billions. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

50 Increase AD Decrease AD No Change in AD Situation: Productivity rises for the fourth straight year. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

51 Increase AD Decrease AD No Change in AD Situation: President/Congress cut defense spending by 20 percent; no increase in domestic spending. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

52 Increase AD Decrease AD No Change in AD Situation: Consumer indebtedness rises. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

53 Increase AD Decrease AD No Change in AD Situation: Dollar appreciates in foreign exchange markets. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

54 Increase AD Decrease AD No Change in AD Situation: Business profit expectations fall. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

55 Increase AD Decrease AD No Change in AD Situation: The price of imported resources skyrockets. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

56 Increase AD Decrease AD No Change in AD Situation: Consumers expect the price level to rise. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

57 Increase AD Decrease AD No Change in AD Situation: Consumer wealth plummets as stock prices fall. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

58 Increase AD Decrease AD No Change in AD Situation: Excess plant capacity decreases significantly. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

59 Increase AD Decrease AD No Change in AD Situation: Interest rates rise. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

60 Increase AD Decrease AD No Change in AD Situation: Foreign incomes fall. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

61 Increase AD Decrease AD No Change in AD Situation: Dollar value depreciates in foreign exchange markets. Price Level Real GDP AD A B C Always start at curve B. Click the correct curve to go to the next slide.

62 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 This AD/AS Model of the Economy shows an economy in TROUBLE…Aggregate Demand is intersecting Aggregate Supply on the HORIZONTAL section of SRAS...This economy is in a SEVERE RECESSON boardering on a DEPRESSION. Unemployment Rate 15%(?)

63 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 A VERY large Recessionary Gap This means it is currently producing a RGDP that is WAY inside its ability to produce RGDP. Unemployment Rate 15%(?)

64 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 Aggregate Demand INCREASES from AD1 to AD2 Still a LARGE Recessionary Gap But not a large as before Still a LARGE Recessionary Gap But not a large as before Unemployment Rate 10%(?)

65 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP3 Aggregate Demand INCREASES from AD2 to AD3 The Recessionary Gap Is shrinking… The Recessionary Gap Is shrinking… Unemployment Rate 8%(?)

66 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP3 Aggregate Demand INCREASES from AD2 to AD3 The Recessionary Gap Is shrinking… The Recessionary Gap Is shrinking… As AD INCREASES from AD1 to AD3 the economy is INCREASING its RGDP but the Price Level is NOT INCREASING….WHY????

67 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP3 Aggregate Demand INCREASES from AD2 to AD3 The Recessionary Gap Is shrinking… The Recessionary Gap Is shrinking… Between RGDP 1 and RGDP 3 there are lots of under-employed resources ( excess inventories) AND PEOPLE---Unemployment is very high..When unemployment and Inventories are high there is little to NO pressure on prices to increase because there is plenty of slack resources. Even though RGDP is Increasing the is no upward pressure on the Price Level over this range of RGDP.

68 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP4 AD4 RGDP 3 PL 2 Recessionary Gap BUT….the story changes as the economy moves to AD 4. RGDP INCREASES but so does the PRICE LEVEL….As we approach Full- Employment (closer to where SRAS intersects LRAS) the economy has FEWER slack resources (inventories are decreasing) AND Unemployment is DECREASING more rapidly…There is INCREASING pressure on the PRICE LEVEL to INCREASE… Unemployment Rate 7%(?)

69 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP4 AD4 RGDP 3 PL 2 Recessionary Gap This is NOT dangerous for the Economy at this point…Actually it can be quite healthy…Increasing prices are GOOD for Business and Increasing wages are GOOD for Workers…

70 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP4 AD4 RGDP 3 PL 2 AD5 PL 3 RGDP5 As a matter of fact, when AD 5 intersects SRAS and LRAS the Economy is considered to be at FULL-EMPLOYMENT---The Sweet Spot for this economy…The total demand for goods and services EQUALS the economys ability to produce those goods and services in the Short Run (SRAS) AND the Long Run (LRAS) Unemployment Rate 5%(?)=NRU

71 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP4 AD4 RGDP 3 PL 2 AD5 PL 3 RGDP5 At FULL-EMPLOYMENT we have eliminated the Recessionary Gap. A couple of KEY points about this Equilibrium: 1.The economy is at its Natural Rate of Unemployment (Frictional + Structural) with NO cyclical unemployment At FULL-EMPLOYMENT we have eliminated the Recessionary Gap. A couple of KEY points about this Equilibrium: 1.The economy is at its Natural Rate of Unemployment (Frictional + Structural) with NO cyclical unemployment

72 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP4 AD4 RGDP 3 PL 2 AD5 PL 3 RGDP5 At FULL-EMPLOYMENT we have eliminated the Recessionary Gap. A couple of KEY points about this Equilibrium: 2. The Economy is at its: NON-ACCCELERATING INFLATION RATE OF UNEMPLOYMENT (NAIRU) Fancy way of saying we are Inflation Neutral at the Natural Rate of Unemployment (NRU) At FULL-EMPLOYMENT we have eliminated the Recessionary Gap. A couple of KEY points about this Equilibrium: 2. The Economy is at its: NON-ACCCELERATING INFLATION RATE OF UNEMPLOYMENT (NAIRU) Fancy way of saying we are Inflation Neutral at the Natural Rate of Unemployment (NRU)

73 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP4 AD4 RGDP 3 PL 2 AD5 PL 3 RGDP5 AD6 PL 4 RGDP6 If the AD shifts to AD 6 the economy has now gone beyond FULL- EMPLOYMENT and is now producing RGDP 6. The unemployment rate is now something LESS than the NRU (wages will start to increase faster)…The Economy is starting to overheat !(Demand for goods and services is GREATER than the economys ability to produce goods and services!... Unemployment Rate 3%-- less than theNRU Inflationary Gap

74 Price Level Real GDP SRAS LRAS FE RGDP AD1 PL 1 RGDP1 AD2 RGDP2 AD3 RGDP4 AD4 RGDP 3 PL 2 AD5 PL 3 RGDP5 AD6 PL 4 RGDP6 PL 5 RGDP 7 AD7 If AD increases to AD 7 then we have a LARGE increase in PRICE LEVEL with NO increase in RGDP (RGDP 7 = RGDP 6 ) This economy is in TROUBLE--- INFLATION Is the Problem of the Day…. Inflationary Gap

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76 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC AD1

77 Price Level Real GDP Fe RGDP LRAS SRAS AD PL 1 PL* AD 1 Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC RGDP 1

78 Price Level Real GDP Fe RGDP LRAS SRAS AD PL 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC SRAS 1 STAGFLATION RGDP 1

79 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC SRAS 1

80 Directions for the next set of slides: Analyze the situation or event and determine the effect on AD or short run AS. Shift the appropriate curve and determine change in PL, Real GDP and Unemployment.

81 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC AD1 Congress passes a tax cut for the middle class, and the president signs it.

82 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC SRAS 1 New oil discoveries cause large decreases in oil prices

83 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC AD1 The government increases spending on schools, highways, and other public works

84 Price Level Real GDP Fe RGDP LRAS SRAS AD PL 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC SRAS 1 STAGFLATION RGDP 1 Production costs increase nationwide

85 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC SRAS 1 New technology and better education increase productivity.

86 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC AD1 A new president makes consumers and businesses more confident about the future economy

87 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC AD1 With the unemployment rate at five percent, the federal government reduces personal taxes and increases spending

88 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC AD1 Foreign incomes increase

89 Price Level Real GDP Fe RGDP LRAS SRAS AD PL 1 PL* AD 1 Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC RGDP 1 Excess plant capacity increases.

90 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC SRAS 1 Dollar appreciates; relative prices of imported resources fall.

91 Price Level Real GDP Fe RGDP LRAS SRAS AD PL 1 PL* AD 1 Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC RGDP 1 Consumer indebtedness increases; consumption falls

92 Price Level Real GDP Fe RGDP LRAS SRAS AD PL 1 PL* AD 1 Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC RGDP 1 Interest rates rise; business investment falls.

93 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC SRAS 1 A new administration increases subsidies to businesses.

94 Price Level Real GDP Fe RGDP LRASSRAS AD PL 1 RGDP 1 PL* Aggregate Demand /Aggregate Supply What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC What happened to: Price Level INC DEC RGDP INC DEC Unemployment INC DEC AD1 Promising research increases business profit expectations.


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