Economic Fluctuations Aggregate Demand & Supply

Aggregate Demand and Real Expenditures Aggregate Demand: The relationship between the general price level and total spending in the economy. Real Expenditures: Total spending in an economy adjusted for changes in price level. GDP Deflator: an indicator of price changes for all goods and services produced in the economy.

Aggregate Demand Curve Aggregate Demand Schedule: The relationship between the general price level and total spending in the economy expressed in a table.

Aggregate Demand Determined by two factors. – Wealth: Assets people own. Determined by Real Value of Assets= Nominal Value/price level. When the price rises the value of assets decreases. Called the Wealth Effect. – Foreign Trade: Changes in price level influences foreign trade. Gets higher trade goes down.

Changes in Aggregate Demand There are Aggregate Demand Factors that shift the whole curve. This will cause either a increase or decrease in aggregate demand.

Changes These changes are caused by – Consumption Disposable Income Wealth Consumer Expectation Interest Rate – Investment Interest Rates Business Expectations Government Purchases Net Exports- Foreign Incomes & Exchange Rates

Aggregate Supply Aggregate Supply: the relationship between the general price level and real output produced in the economy. Aggregate Supply Schedule: the relationship between the general price level and real output expressed in a table.

Aggregate Supply Curve This determines the amount of output a country produced depending on their employment in compared with Full Employment.

Aggregate Supply Factors There are factors that shift the whole supply curve. These are: – Input Prices – Resource Prices – Productivity – Government Policies

Equilibrium (again….) Economy’s equilibrium price level of real output occurs at intersection of AD & AS Represents Willingness consumers will buy and businesses supply.

The Leaky Bucket Example simple bucket – a model of how an economy functions simple economy I – all consumption (C) is spent by businesses on productive resources simple economy II, with savings (S) – leakage from bucket of savings simple economy III, with savings, and investment (I) – injection of investment offsets the leakage of savings

The Leaky Bucket causes of changes in savings – influenced by income and spending patterns causes of changes in investment – future expectations, interest rates 1.S = I  Equilibrium and stability 2.S leakages 3.S > I  Contracting economy as leakages > injections

The Leaky Bucket simple economy IV, with government injections – injection of government spending (G) is offset by leakage taxation (T) simple economy V, with foreign trade – injection of exports (X) make up 25% of Canadian income and are offset by leakage of imports (M) which are directly related to income levels

The Leaky Bucket Summary 1.M + T + S = X + G + I  Equilibrium and stability 2.M + T + S leakages 3.M + T + S > X + G + I  Contracting economy as leakages > injections

The Leaky Bucket

Demand-Pull Inflation If full employment exists (full bucket) and injections (X + I + G) > leakages M + S + T) then no more goods & services can be produced, only prices will rise (inflation, water spilling out of the bucket) Demand for goods & services > quantity of goods & services pulls up prices

Economic Growth When GDP increases and potential output increases. – Determined by Labour Productive=Real Output/Total Hours work.

Business Cycle