This chapter introduces the model’s two key pieces—the aggregate-demand curve and the aggregatesupply curve. After getting a sense of the overall structure of the model in this chapter, we examine the pieces of the model in more detail in the next two chapters.
Trang 1Review of the previous Lecture
° All societies experience short-run economic fluctuations around long-run trends
¢ These fluctuations are irregular and largely unpredictable
Trang 2Review of the previous Lecture
¢ Economists analyze short-run economic fluctuations using the aggregate demand and aggregate supply model
Trang 3Review of the previous Lecture
¢ The aggregate-demand curve slopes downward for three reasons: a wealth effect, an interest rate effect, and an exchange rate effect
Trang 4Lecture 24
Aggregate Demand and Aggregate Supply
Instructor: Prof.Dr.Qaisar Abbas
Trang 5Lecture Outline
1 Aggregate supply curve 2 The Long-Run Equilibrium
Trang 6The Aggregate-supply Curve
¢ Inthe long run, the aggregate-supply curve Is vertical
¢ Inthe short run, the aggregate-supply curve is upward sloping ¢ The Long-Run Aggregate-Supply Curve
— Inthe long run, an economy’s production of goods and services
depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services
Trang 7Price Level 1 A change in the price level Aggregate-supply The Long-Run Aggregate-Supply Curve Long-run aggregate supply ee ee ee ee ee ee ee me me ee ee me me ee ee
2 does not affect the quantity of goods
and services supplied ⁄ in the long run
Natural rate Quantity of
Trang 8The Aggregate-supply Curve
¢ The Long-Run Aggregate-Supply Curve
— The long-run aggregate-supply curve is vertical at the natural rate of
output
Trang 9Why the Long-Run Aggregate-Supply Curve Might Shift
° Any change in the economy that alters the natural rate of output shifts the long-run aggregate-supply curve
Trang 10Long-Run Growth and Inflation
2 and œoadh in the Lang+un
money supply shifts aggregate
aggregate demand supply,
Trang 11A New Way to Depict Long-Run Growth and Inflation
Trang 12Why the Aggregate-Supply Curve Slopes Upward in the Short Run
¢ Inthe short run, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied
Trang 13The Short-Run Aggregate-Supply Curve Price Level short-run aggregate supply AL 1 A decrease in the price
Trang 14Why the Aggregate-Supply Curve Slopes Upward in the Short Run
¢ The Misperceptions Theory
¢ The Sticky-Wage Theory
Trang 15Why the Aggregate-Supply Curve Slopes Upward in the Short Run
¢ The Misperceptions Theory
— Changes in the overall price level temporarily mislead suppliers about what is happening in the markets in which they sell their output:
— A lower price level causes misperceptions about relative prices
Trang 16Why the Aggregate-Supply Curve Slopes Upward in the Short Run
¢ The Sticky-Wage Theory
— Nominal wages are slow to adjust, or are “sticky” in the short run: ¢ Wages do not adjust immediately to a fall in the price level ¢ A lower price level makes employment and production less
profitable
Trang 17Why the Aggregate-Supply Curve Slopes Upward in the Short Run
¢ The Sticky-Price Theory
— Prices of some goods and services adjust sluggishly in response to changing economic conditions:
¢ An unexpected fall in the price level leaves some firms with higher- than-desired prices
Trang 19Why the Aggregate Supply Curve Might Shift
° An increase in the expected price level reduces the quantity of goods and services supplied and shifts the short-run aggregate supply curve to the left
Trang 212 Causes output to fall in the short run Price Level Long-run Short-run aggregate aggregate supply, AS supply AS ———— 3 but over time, the short-run R A aggregate-supply \ curve shifts D í 1 A decrease in P, C aggregate demand Aggregate demand, AD AD, 0 Ÿ; x \ Quantity of
4 and output returns Output
Trang 22A Contraction in Aggregate Demand
2 Causes output to fall inthe shortrun
Price
Level
Long-run Short-run aggregate
aggregate supply, AS, supply AS, nn 3 but over time, the short-run P, "¬" ` ` ` ` aggregate-supply curve shifts P sens ens ene ene ene eneeesensrnsenseesensemeemenns - 1 Adecrease in rs faa "mm C aggregate demand ———¬ Aggregate demand, AQ, AD, 0 TS Ys \ Quantity of
4 and output returns Output
Trang 23Two Causes Of Economic Fluctuations
¢ Shifts in Aggregate Demand
— Inthe short run, shifts in aggregate demand cause fluctuations in the economy’s output of goods and services
Trang 24Two Causes Of Economic Fluctuations
¢ An Adverse Shift in Aggregate Supply
— A decrease in one of the determinants of aggregate supply shifts the curve to the left:
¢ Output falls below the natural rate of employment ¢ Unemployment rises
Trang 25Price Level Py 8 3 and the price level to rise 0
2 Causes output to fall
An Adverse Shift in Aggregate Supply
Trang 26The Effects of a Shift in Aggregate Supply
¢ Stagflation
— Adverse shifts in aggregate supply cause stagflation—a period of recession and inflation
¢ Output falls and prices rise
Trang 27The Effects of a Shift in Aggregate Supply
¢ Policy Responses to Recession
— Policymakers may respond to a recession in one of the following ways: ¢ Do nothing and wait for prices and wages to adjust
Trang 28Accommodating an Adverse Shift in Aggregate Supply Price Level 3 which Ø, causes the price level to rise further ¿ Long-run aggregate supply
© 8 ee me me me ee eee fee ee eee egg ce Fe fe Fe Fe Pe ee Pe eee ee eee
4 but keeps output
at its natural rate
1 When short-run aggregate supply falls Short-run AS aggregate supply, AS, 2 policymakers can accommodate the shift by expanding aggregate demand AD,
\ Aggregate demand, AD, Natural rate Quantity of
Trang 29Summary
¢ Inthe long run, the aggregate supply curve Is vertical
¢ The short-run, the aggregate supply curve is upward sloping
Trang 30Summary
¢ Events that alter the economy’s ability to produce output will shift the short- run aggregate-supply curve
¢ Also, the position of the short-run aggregate-supply curve depends on the expected price level