代写Macro1 (Econ1010)Aregaggte demand and aggregate supply

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代写Macro1 (Econ1010)Aregaggte demand and aggregate supply
•Macro1 (Econ1010) Lecture 9
(Chapter 33)

•Aregaggte demand (AD) and aggregate supply (AS)

•Insert lecturer’s name and contact here

•The Big Picture of the Topic

•This topic looks at the economy in the short run

•How long is the long/short run?

•What is the main difference?

•Output Over Time

•Okay, let me ask again. Has the growth been stable?

•The Business Cycle

•Fluctuations in the economy are often called the business cycle

•What are the phases of the cycle?

•What is the difference between a recession and depression?

•When did we last have these in Australia?

•Three key facts about economic fluctuations

1.Economic fluctuations are irregular and unpredictable.

2.Most macroeconomic variables (that measure some type of income or production) fluctuate together

•Do they do so by the same amounts?

3.As output falls, unemployment rises

•Why?

•Let’s see all this...

•Investment Over Time

•Unemployment Over Time

•Explaining short-run economic fluctuations

•Most economists believe that classical theory describes the world in the long run but not in the short run

•

–What about the changes in the money supply?

–What about monetary neutrality?

•Recap: long-run theory

•Chapter 26: GDP depends on

–number of workers

–physical capital per worker

–human capital per worker

–natural resources per worker

–technological knowledge

–laws, government policies, and their enforcement

•Chapter 27: saving, investment, and the real interest rate depend on the supply and demand for loanable funds

•Chapter 28: unemployment depends on

–how well the labor market matches unemployed workers to job vacancies, and

–how close the wage is to the equilibrium wage

•Chapter 30: the price level depends on the quantity of money, and the rate of inflation depends on the growth rate of the quantity of money

•The factors that affect the real interest rate and the inflation rate together determine the nominal interest rate

•The basic model of economic fluctuations

•Two main macroeconomic variables, output and prices, are used to develop a model to analyze the short-run fluctuations.

–The economy’s output of goods and services measured by ...?

–The overall price level measured by...?

•The model looks at the aggregated behaviour of households and firms, how it is affected by Y and P and how these in turn affect the behaviour

•Aggregate Demand

•The aggregate-demand curve (AD) shows the quantity of goods and services that households, firms, and the government want to buy at each price level

–An important note: it is also possible to present the model in terms of inflation rather than the price level, with the intuition slightly changed (inflation rate used in a textbook)

–In the slides (also in the assignment and exam) we will use P (price level) rather than Inflation Rate since it is easier to understand.

•What are the components of AD?

(hint: recall Y = C + I + G + NX)

•AGGREGATE DEMAND

•The aggregate demand for goods and services has four components:

Aggregate Demand = C + I + G + NX

•Aggregate Supply = Y

•In equilibrium, supply = demand

•Therefore, in equilibrium
Y = C + I + G + NX

•The aggregate-demand curve

•Bonus slide: why the demand curve for ice cream can’t explain the AD curve

•The demand curve for an individual commodity is downward sloping because of two effects:

–Substitution effect: when ice cream becomes cheaper people buy more ice cream because they are switching from frozen yogurt (a substitute)

–Income effect: when price of ice cream falls and income is unchanged, people feel richer and, therefore, buy more ice cream

•But the AD curve can consider only changes in the overall price level. If all prices decrease, there can be no substitution effect

•It is inconsistent to talk about changes in aggregate demand while assuming unchanged income, because aggregate income must be equal to aggregate demand. Therefore, the income effect can’t be applied to the aggregate economy.

•Why the aggregate-demand curve is downward sloping

1) The price level and consumption − the wealth effect:

–Everything else constant, how will a decrease in the price level make consumers feel?

–What will they do?

–How will this affect AD?

•Why the Aggregate-Demand Curve Is Downward Sloping: the Wealth Effect (the Pigou effect)

•P↓ causes the purchasing power of consumers’ monetary wealth ↑

•This causes consumption ↑

–Besides, if a price decline is perceived to be temporary it makes sense to buy what you need now, while prices are still low

代写Macro1 (Econ1010)Aregaggte demand and aggregate supply

2) The price level and investment − the interest rate effect (also known as theory of liquidity preference):

–Everything else constant, how will a decrease in the price level affect the interest rate?

–How will this affect investment and AD?

3) The price level and net exports − the exchange-rate effect:

–How will the above decrease in the interest rate affect the real exchange rate?

–How will this affect NX and AD?

–Use the open economy model…

•Why the Aggregate-Demand Curve Is Downward Sloping: the Interest Rate Effect

•P↓ causes nominal interest rate ↓

–Fisher effect (reminder:

Nominal interest rate=Real interest rate + Inflation (P)

•nominal interest rate ↓ encourages greater investment spending by businesses (I ↑)

•I ↑ means aggregate demand (C+I+G+NX) ↑

•Why the Aggregate-Demand Curve Is Downward Sloping: the Exchange-Rate Effect

•We go through Open Economy in Week 11 (so do not worry about this slide)

•P↓ causes nominal interest rate ↓

–The same Fisher effect

•Foreigners sell the dollars they had been holding in AUS banks

•The value of the dollar ↓

•As a result, home goods become cheaper relative to foreign goods.

•This makes home net exports increase (NX ↑)

•NX↑ means aggregate demand (C+I+G+NX) ↑

•Shifts of AD and along AD

•Which of these 3 effects is the most important for the Australia economy?

•If P changes, does this shift the AD?

–move along the curve

•Many other factors, however, affect the quantity of goods and services demanded at any given price level.

–Move of the whole curve

–Possibly sources of shifts?

•Shifts in the Aggregate Demand Curve

•Why the Aggregate-Demand Curve Might Shift

•Shifts arising from

–Consumption: consumer optimism, tax rates, prices of assets (stocks, bonds, real estate)

–Investment: technological progress, business confidence, tax rates, money supply

–Government Purchases

–Net Exports: foreign GDP, expectations about exchange rates

•The aggregate-supply curve

•The aggregate-supply curve (AS) shows the quantity of goods and services that firms choose to produce and sell at each price level.

•In the long run (LR), is Y affected by P?

•What is then the slope of LRAS?

•The long-run aggregate-supply curve

•Why the Long-Run Aggregate-Supply Curve Might Shift

•Any change in the economy that alters the natural rate of output will shift the long-run aggregate-supply curve.

–Labor: population growth, immigration, natural rate of unemployment

–Capital, physical or human

–Natural Resources: price of imported oil

–Technology

–Laws, government policies

•The short-run aggregate-supply curve

•What is the main difference between the LR and the short run (SR)?

•We empirically observe that in the SR, unlike the LR, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied.

•A decrease does the opposite

•Put differently, P has temporary but not permanent positive effect on Y

•What does the SRAS look like then?

•Let’s show this in a diagram

•The short-run aggregate-supply curve

•WHY does a nominal variable like M or P have effect on a real variable like Y???

•There are 3 main theories

•All have something to do with some imperfections in the adjustment process

•All lead to an upward sloping SRAS

代写Macro1 (Econ1010)Aregaggte demand and aggregate supply

•(1) the misperceptions theory

•(2) the sticky-wage theory

•(3) the sticky-price theory

•The short-run aggregate-supply curve

(1) The misperceptions theory

–Firms: changes in the overall price vs relative prices

•What does a firm do if the prices of its products fall?

–See the example in next slide

•Shape of the AS Curve: The Misperceptions Theory example

•Suppose an overall decline in demand reduces all prices

•A wheat farmer, however, sees only that wheat prices have fallen and continues to believe that the prices of the things that she buys (milk, shoes, clothes, etc.) are unchanged at the level she had expected

•This makes work less attractive and the farmer reduces her production of wheat.

–I am assuming that the wheat farmer knows only how to produce wheat…..

•When this is repeated across the economy, both the overall price level and total output fall

•The short-run aggregate-supply curve

•(2) The sticky-wage theory (wage rigidity)

–Are nominal wages slow or fast to adjust? Why?

–If there is an unexpected fall in the price level what then happens to the real wage?

–And the quantity of goods and services supplied?

•The Sticky-Wage Theory

•Suppose wages for 2016 were set in 2015

•These wage agreements were based on the output prices that were expected to prevail in 2015

•Suppose actual prices in 2016 fall short of what was expected

•Wages do not adjust immediately to the unexpectedly low price level.

•An unexpectedly low price level and an unchanged wage level makes employment and production less profitable.

•This induces firms to reduce the quantity of goods and services supplied.

•The short-run aggregate-supply curve

•(3) The sticky-price theory (price rigidity)

–Do firms change prices frequently or infrequently? Why?

–If there is an unexpected fall in the price level what then happens?

–What does this do to sales?

•Upward slope of the AS Curve: 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.

–This depresses their sales, which induces these firms to reduce the quantity of goods and services they produce.

•The Shifts in the SRAS

•If P changes, does this shift the SRAS?

–move along the curve

•Many other factors, however, affect the quantity of goods and services supplied at any given price level.

–Move of the whole curve

–Possible sources of shifts?

•Does the SRAS shifts with the LRAS?

•What role do expectations of firms and household play?

–If there is an increase in the expected price level, how does it affect the quantity of goods and services supplied and the SRAS? Why?

•How the SRAS curve shifts

•SRAS1 shows the aggregate supply curve for 2010

•the expected price level and the natural rate of output, must be on the SRAS curve

•If either Pe↓ or YN↑, the green dot moves down or to the right

•When the green dot shifts, so must the AS curve

•The long-run equilibrium

•Two causes of recession

•In some LR equilibrium (called the steady state) all the main variables are either constant or change by a certain (unchanging) percentage

•For example: inflation is 2% each year, output growth is 3% each year etc.

•New economic developments (shocks) however may shift the three curves further and this leads to SR fluctuations

•The economy then has a tendency to go back to some LR equilibrium (either the original one or a new one).

•This works through the supply side and is called the self-correcting mechanism

•Think of it as a Spring

•Case (1): A Contraction in Aggregate Demand

•Case (1): ECONOMIC FLUCTUATIONS: AD

•In summary

•Contraction (leftward shift) in Aggregate Demand (AD)

–In the short run,

•output decreases,

•the overall price level decreases, and

•the unemployment rate increases

–In the long run,

•the overall price level decreases,

•but output and the unemployment rate remain unchanged at their long-run levels

•Case (2): ECONOMIC FLUCTUATIONS: AS

•A leftward shift in Short-Run Aggregate Supply

–Output falls below the natural rate of employment

–Unemployment rises

–The price level rises

•If the government does nothing, the SRAS will shift back to where it was.

–The price level, total production and unemployment will be unaffected in the long run.

•Case (2): An Adverse Shift in Aggregate Supply

•Stagflation

•Adverse shifts in aggregate supply cause stagflation — a period of recession and inflation

–Output falls and prices rise.

–Can policymakers do something about it?

–Will discuss this in detail next week

•When did Australia last experience it?

•An Important Question

•Does the economy always self-corrects?

•A heated debate now among economists

•Neo-classical economists answer yes, Keynesians no

•All the time, this is debated in the time of crisis like the one we had recently (GFC)

代写Macro1 (Econ1010)Aregaggte demand and aggregate supply

•All societies experience short-run economic fluctuations around long-run trends.

•These fluctuations are irregular and largely unpredictable.

•When recessions occur, real GDP and other measures of income, spending, and production fall, and unemployment rises.

•Summary

•Economists analyse short-run economic fluctuations using the aggregate demand and aggregate supply model.

•According to this model, the output of goods and services and the overall level of prices adjust to balance aggregate demand and aggregate supply.

•Summary

•The aggregate-demand curve slopes downward for three reasons: a wealth effect, an interest rate effect, and an exchange rate effect.

•Any event or policy that changes consumption, investment, government purchases, or net exports at a given price level will shift the aggregate-demand curve.

•Summary

•In the long run, the aggregate supply curve is vertical.

•The short-run, the aggregate supply curve is upward-sloping.

•The are three theories explaining the upward slope of short-run aggregate supply: the misperceptions theory, the sticky-wage theory and the sticky-price theory.

•Summary

•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.

•One possible cause of economic fluctuations is a shift in aggregate demand

•A second possible cause of economic fluctuations is a shift in aggregate supply.

•Stagflation is a period of falling output and rising prices.

代写Macro1 (Econ1010)Aregaggte demand and aggregate supply