1. Aim: What is Macroeconomics and AD?

2. Roots of Macroeconomics The Great Depression Classical economists believed that the economy was self correcting Keynes believes that aggregate demand determines unemployment, not price and wages

3. Recent Macroeconomic History Fine Tuning: 1960s Disillusionment –Recessions: 1974-1975, 1980-1981 –High Inflation: 1974-1975 & 1979-1981 –Moderate Recession 1990-1991 –Stagflation – overall price level rising during recessionary periods Good Times: 1990s into next century

4. Macroeconomic Concerns Aggregate price level – inflation Aggregate output – production of goods and services Total Employment International economy’s relationship to the domestic economy

5. The Role of Government in the Macro economy Fiscal Policy Monetary Policy Income Policies – direct attempt by the govt to control prices and wages Supply-Side Policies – use tax system to increase production – trickle down economics

6. Components of Aggregate Demand Measures the relationship between spending & income: components of spending which make up the AD model are consumption, investment and savings The AD reflects the changes in demand when the price level for all goods and services increases or decreases

7. When the general price level increases we do not substitute one good for another, rather we as a nation buy less goods and services The substitutes in this case are money financial assets, good and services in the future and imports.

8. Economists identify three primary effects that increase real GDP when the price level decreases and decrease real GDP when the price level increases. These effects explain why a given AD curve has a negative slope: –Real Wealth or Real Balance Effect –Foreign Trade Effect –Interest Rate Effect

9. AD curve shifts right when Consumption increases as a result from –Expectations of inflation or shortages in the future –Increased incomes or wealth –Optimism about jobs and income

10. Investment increases when –Interest rates drop –Investors gain optimism Government carries out expansionary policy such as –Increase in spending –Increase in the money supply –Decrease in taxes Net exports increase when –Exchange rate decreases (imports decrease) –Foreign income increases (exports decrease)

11. Aggregate Supply indicates the total value of output producers are willing and able to supply at alternative price levels in a given period Short-Run AS – flat depression range, a positively sloped intermediate range, and a vertical physical limit

12. – horizontal range: large inventories and excess capacity, suppliers would be happy to sell more output at the existing price level, workers are plentiful & the economy can increase output without placing upward pressure on prices or wages – intermediate range: positive slope, normal range of operation, no excess inventories, gives firms the incentive they need to increase employment and produce more goods and services

13. –vertical range: when factories cannot run any faster and workers cannot work any more overtime – the economy has reached its physical limit for output, the economy reaches full employment Long-Run AS – no cyclical unemployment, increases of output do not place upward pressure on wages and other input prices

14. AS curve shifts right when Inputs become cheaper, more productive or more plentiful as with – new discoveries of raw materials – increases in the labor supply – decreases in wages or other input prices – improvements in education or training – decreased inflationary expectations – increased investment – more capital – technological advances

15. Government policies reduce production costs as with – tax cuts – deregulation – reform in welfare or unemployment insurance programs Weather is good and or macro disturbances cease such as – wars – natural disasters