Presentation is loading. Please wait.

Presentation is loading. Please wait.

Eco 200 – Principles of Macroeconomics

Similar presentations

Presentation on theme: "Eco 200 – Principles of Macroeconomics"— Presentation transcript:

1 Eco 200 – Principles of Macroeconomics
Chapter 9: Macroeconomic Equilibrium (AD/AS)

2 Aggregate demand and supply
Aggregate demand – a relationship between the price level and the equilibrium quantity of real GDP demanded. Aggregate supply – a relationship between the price level and the equilibrium quantity of real GDP supplied.

3 Macroeconomic equilibrium

4 Demand-pull inflation
Demand-pull inflation is caused by an increase in AD

5 Business cycle expansion
As AD rises, output rises, and unemployment falls

6 Business cycle contraction
As AD falls, output falls and unemployment rises

7 Cost-push inflation Cost-push inflation is caused by a reduction in AS.

8 Stagflation Rising prices and falling output

9 Aggregate demand Aggregate demand (AD) consists of spending on GDP by:
consumers (C) firms (I) the government (G), and the foreign sector (X) Anything that increases C, I, G, or X at a given price level results in an increase in AD.

10 Factors affecting Consumption
Income Wealth Expected future income and wealth Demographics Taxes

11 Factors affecting Investment
Interest rate Technology Cost of capital goods Capacity utilization

12 Government spending Determined by government authorities

13 Factors affecting net exports
Foreign and domestic income Foreign and domestic price levels Exchange rates Government policy (tariffs, trade restrictions, etc.)

14 Aggregate expenditures
AE = C+I+G+X AE is affected by any factor that changes C, I, G, or X.

15 Aggregate demand Note that AD curve is not the same as the demand curve for a particular good negative slope is NOT the result of income and substitution effects Why is it downward sloping? Wealth effect Interest rate International trade effect

16 Wealth effect As the price level rises:
the real value of dollar-denominated assets decline (real wealth declines) this decline in wealth results in a reduction in consumption spending This effect is also called the real-balance effect (or Pigou effect)

17 Interest-rate effect As the price level rises:
Individuals must hold more money to pay for transactions To acquire more money, households sell bonds, and other financial assets. As more bonds are sold, the price of bonds declines A decline in bond prices results in a higher rate of return (interest rate) on bonds and other financial assets A higher interest rate results in a reduction in investment and consumption spending

18 International trade effect
As the domestic price level rises: Imports become relatively cheaper, Exports become relatively more expensive Exports decline, imports rise, and net exports decline

19 Combined price-level effects
As the price level rises, AE falls due to the combined wealth, interest-rate, and international trade effects

20 Nonprice determinants of AD
Anything that changes C, I, G, or X at a given price level will cause the AD curve to shift Effects of: Expectations (consumer and investor confidence) Foreign income and price levels Government policy

21 Aggregate supply Price-level effects
Assumption: Resource prices adjust more slowly than output prices As price level rises, production becomes more profitable and the quantity of output supplied rises.

22 Aggregate supply

23 Short-run Aggregate Supply

24 Long-run Aggregate Supply
Resource and output prices are assumed to be flexible in the long run. Output = potential real GDP.

25 Changes in Short-Run AS
Resource prices Technology Expectations

26 Changes in Long-Run AS Changes in the quantity and/or quality of resources Technology

27 Macroeconomic equilibrium

28 Short-run effect of an increase in AD

29 Long-run adjustment process

Download ppt "Eco 200 – Principles of Macroeconomics"

Similar presentations

Ads by Google