Download presentation
Presentation is loading. Please wait.
1
Chapter 19 Aggregate Demand and Aggregate Supply
Principles of Economics by Fred M Gottheil PowerPoint Slides prepared by Ken Long 4/21/2017 ©1999 South-Western College Publishing
2
What is the Business Cycle?
Alternating periods of growth and decline in an economy’s GDP ©1999 South-Western College Publishing
3
Aggregate Output Trough Peak The Business Cycle Time 3
4
What are the four stages of the Business Cycle?
trough expansion peak recession ©1999 South-Western College Publishing
5
Aggregate Output Trough Peak The Business Cycle Time 5
6
Time Aggregate Output The Business Cycle Peak Recession Expansion
Trough Time 6
7
What is a Recession? A phase in the business cycle in which the decline in the economy’s real GDP persists for at least 6 months ©1999 South-Western College Publishing
8
What is a Depression? A severe recession
©1999 South-Western College Publishing
9
What is Prosperity? A phase in the business cycle marked by a relatively high level of real GDP, full employment, and inflation ©1999 South-Western College Publishing
10
An increase in the price level
What is Inflation? An increase in the price level ©1999 South-Western College Publishing
11
How do we measure Economic Growth?
Gross Domestic Product ©1999 South-Western College Publishing
12
What is Gross Domestic Product?
GDP is the total value of all final goods and services measured in current market prices, produced in the economy in any one year ©1999 South-Western College Publishing
13
What is a Final Good? A good that is not itself used to produce other goods ©1999 South-Western College Publishing
14
What does “measured in current market prices” mean?
The year in which the good was made, the current market price ©1999 South-Western College Publishing
15
What does “produced in the economy” mean?
It is produced domestically ©1999 South-Western College Publishing
16
For the latest measure of GDP visit -
©1999 South-Western College Publishing
17
How do we make adjustments for prices?
We measure both Nominal and Real GDP ©1999 South-Western College Publishing
18
What is Nominal GDP? GDP measured in terms of current market prices - it is not adjusted for inflation ©1999 South-Western College Publishing
19
What is Real GDP? GDP adjusted for changes in the price level
©1999 South-Western College Publishing
20
What is a Base Year? The reference year with which prices in other years are compared in a price index ©1999 South-Western College Publishing
21
What is the Price Level? A measure of prices in one year expressed in relation to prices in a base year ©1999 South-Western College Publishing
22
What is the Consumer Price Index?
A measure comparing the prices of consumer goods and services that a household typically purchases compared to a base year ©1999 South-Western College Publishing
23
What is the value of the index in the base year?
100 ©1999 South-Western College Publishing
24
If nominal GDP is $750 billion and the price index for that year is 1
If nominal GDP is $750 billion and the price index for that year is 1.11, then real GDP = $750/1.11 (or) $675.68 ©1999 South-Western College Publishing
25
What is the Consumer Price Index (CPI)?
A measure over time of the cost of a fixed ‘market basket’ of consumer goods and services ©1999 South-Western College Publishing
26
How does the GDP index compare with the CPI index?
GDP uses a different basket of goods and services each year whereas the CPI uses a fixed basket determined in the base year ©1999 South-Western College Publishing
27
For the latest measure of CPI visit -
©1999 South-Western College Publishing
28
What is the GDP Price Deflator?
A measure comparing the prices of all goods and services produced in the economy during a given year to the prices of those goods and services purchased in a base year ©1999 South-Western College Publishing
29
Nominal GDP x 100 GDP Deflator
Real GDP = Nominal GDP x 100 GDP Deflator 2929 ©1999 South-Western College Publishing
30
For current and historical data on production -
©1999 South-Western College Publishing
31
What is Aggregate Demand?
The total quantity of goods and services demanded by households, firms, foreigners, and government at varying price levels ©1999 South-Western College Publishing
32
Price Level AD Real GDP 32
33
What factors can explain the downward slope of Aggregate Demand?
Real wealth effect Interest rate effect International trade effect ©1999 South-Western College Publishing
34
Real Wealth Effect As the price level rises, real purchasing power of some assets declines, thus may reduce spending
35
Interest Rate Effect A rise in the price level can raise interest rates, leading to less consumption and investment spending
36
International Trade Effect
A rise in domestic prices relative to foreign prices will reduce exports, raise imports
37
What factors can cause a shift in Aggregate Demand? A change in ...
government spending taxes income abroad expectations ©1999 South-Western College Publishing
38
What is Aggregate Supply?
The total quantity of goods and services that firms are willing to supply at varying price levels ©1999 South-Western College Publishing
39
What is the Shape of the AS curve?
Very controversial, different ways of viewing AS curve
40
One type of AS curve, 3 sections to it
Horizontal section Upward sloping section Vertical section
41
Aggregate Supply Curve
Price level AS Real GDP 41
42
Why is Aggregate Supply perfectly vertical at higher levels of GDP?
Because all resources are fully employed beyond some level of GDP ©1999 South-Western College Publishing
43
Why is the Aggregate Supply Curve horizontal at low levels of GDP?
Because so many resources are not used or are under utilized ©1999 South-Western College Publishing
44
Why is the AS Curve upward sloping at higher levels of GDP?
Because we have run out of some resources so an increase in demand causes those prices to increase ©1999 South-Western College Publishing
45
Aggregate Supply Curve
Price level AS Real GDP 45
46
What is Macroequilibrium?
The level of real GDP and the price level that equate the aggregate quantity demanded and the aggregate quantity supplied ©1999 South-Western College Publishing
47
Shifts in the AD Curve Price level AS P2 AD2 P1 Real GDP AD1 47 Q1 Q2
48
Will any increase in demand cause inflation?
It depends on where the aggregate demand curve falls on the aggregate supply curve No! ©1999 South-Western College Publishing
49
Aggregate Supply Curve
AS Price level AD4 AD3 AD2 AD1 Real GDP 49
50
Shifts in the AS Curve Price level AS1 AS2 P2 P1 Real GDP AD1 50 Q2 Q1
51
What factors can cause a shift in Aggregate Supply? A change in ...
resource availability wages interest rates rents ©1999 South-Western College Publishing
52
What is an example of AD moving along a horizontal AS Curve?
Roosevelt’s New Deal programs in the 1930’s and war related spending after 1939 ©1999 South-Western College Publishing
53
What is an example of AD moving along a positive AS Curve?
Spending on the Viet Nam War in the 1960’s ©1999 South-Western College Publishing
54
What is Demand Pull Inflation?
Inflation caused primarily by an increase in aggregate demand ©1999 South-Western College Publishing
55
What is an example of a decrease in Aggregate Supply?
The OPEC legacy of the 1970’s ©1999 South-Western College Publishing
56
What is Cost-Push Inflation?
Inflation cause primarily by a decrease in aggregate supply ©1999 South-Western College Publishing
57
What other problem can Cost-Push Inflation cause?
Unemployment ©1999 South-Western College Publishing
58
What is Stagflation? A period of stagnating real GDP, inflation, and relatively high levels of unemployment ©1999 South-Western College Publishing
59
For current wealth and income data -
©1999 South-Western College Publishing
60
What is a Recession? What is a Depression? What are the four stages of the Business Cycle? What is Gross Domestic Product? What is Nominal GDP? What is Real GDP?
61
What is the Consumer Price Index?
What is the GDP Price Deflator? What is Aggregate Demand? What is Aggregate Supply? What is Macroequilibrium? What is Stagflation?
Similar presentations
