Ch 26 - Aggregate demand and supply

Friday, March 09, 2012

1:20 AM

 Aggregate supply

 

Quantity of real GDP supplied	Total quantity that firms plan to produce during a given period
Aggregate supply (AS)	Relationship between Q of GDP supplied and price level
Long-run AS	Wages, prices of other goods, potential GDP can vary
Short-run AS	Wages, prices of other goods, potential GDP is fixed

 

SRAS	Price rises: (direct) wages is constant profits increase firms produce more increase in GDP
LRAS	Prices rises: (vertical) profits rise initially firms produce more wage match price increase (cost increase) production decreases LRAS = Potential GDP (pure inflation when LRAS stays constant) Real GDP = Potential GDP (due to wage fluctuations)

 

 AS determinants

Potential GDP	When increase: LRAS and SRAS shift right Change due to: full-employment adjustment Quantity of capital Technology
Wage rate (factor price)	SRAS moves inversely. No affect on LAS.

 

 

 Aggregate Demand

 

AD	Relationship between the quantity of real GDP demanded and the price level
Wealth effect	Prices increase -> wealth falls -> GDP decreases
Intertemporal substitution effect	Interest rate increase -> less spending
International substitution effect	Increase in price -> increase import, decrease export

 

AD dependencies

Price level	Movement along the curve
Expectations	About future income, inflation, profits (direct)
Fiscal policy	Government's taxes (inverse), and transfer payments (direct), government expenditure (direct)
Monetary policy	Interest rates (inverse) and quantity of money (direct)
World economy	Foreign exchange rate (direct)

 

Short-run macro equilibrium	Quantity of real GDP demanded = Quantity of real GDP supplied (SRAS)
Long-run macro equilibrium	AD = SRAS = LRAS

 

Below full-employment eq	Real GDP < potential GDP	Recessionary gap	Money wage rises -> decrease in SRAS
Above full-employment eq	Real GDP > potential GDP	Inflationary gap	Money wage falls -> increase in SRAS
Full-employment eq	Real GDP = potential GDP

 

Multiplier

It is smaller when price fluctuates (increase in GDP increases price level)

 

Stagflation

SRAS decreases, price level rises

 

Classical View	Lassiez-faire
Keynesian	Money wage is "sticky", hard to decrease Need government to offset using taxes
Monetarist	Money wage is "sticky", hard to decrease Need money growth.