6. How do we find national equilibrium?

HOW CAN WE ANALYZE ECONOMIC FLUCTUATIONS?

Aggregate Demand and Aggregate Supply

The History of Recessions in the US

Aggregate Demand

REAL GDP

AND

PRICE LEVELS

Aggregate demand curve shows the relationship between: Aggregate spending on domestic

output (X AXIS) Average price levels (Y AXIS)

What does this look like?

Why is it downward sloping? Foreign Sector Substitution effect:

If prices rise domestically Look internationally

If prices fall domestically Buy more domestically

Why is it downward sloping? Interest rate effect:

If prices rise Need to borrow more Interest rates rise

I falls C falls

If prices fall Need to borrow less

Interest rates fall I increases C increases

Why is it downward sloping? The Wealth effect:

If price rises The purchasing power falls

The quantity of domestic output demanded falls

SHIFTs IN THE AD Consumption will…

Investment will…

Increase AD if… Decrease AD if…More wealth Less wealthMore optimistic Less optimisticLess taxes More taxes

Increase AD if… Decrease AD if…Lower real interest rate Higher real interest rateHigher expected returns Lower expected returns• Due to future expectations about profitability

AD SHIFTS: G and NX (X-M)

Increase AD with more spending

Decrease AD with less spending

Increase AD if…

Decrease AD if…

Strong Dollar(more imports, less exports)

Weak Dollar(more exports, less imports)

Strong Foreign Economies(we export more)

Weak Foreign Economies(we export less)

Government spending will Net Exports

Representations of Shifts in the AD

Increase of AD (right) Decrease in AD (left)

Governmental Policies

Taxes Can increase or

decrease C and I Government

Spending Increase G

Increase Money More C and More I

Decrease Money Less C and Less I

Fiscal Policy Monetary Policy

Presentation Guidelines 1. Establish roles: (see back board) 2 min. 2. Read your excerpt and fill in WS. 5 min. 3. Find another credible source for info. 5

min. 4.Create your presentation of information

and include: 15 min. Description of your concept (50 points) Graphs or image of your concept (20 points) Jingle, rap, acronym, or dance to remember

your concept (20 points) Creativity (10 points)

Aggregate Supply

PL

And

Real GDP

Shows the relationship between average price level and the domestic output produced

SHORT RUN VS. LONG RUN

Input $ do not adjust to changes in the PL Keynesian school

Input $ are flexible and adjust to changes in PL Classical school

SHORT RUN: PD. OF TIME WITH STICKY PRICES (COSTS) AND WAGES

LONG RUN: PD. OF TIME WHEN PRICES (COSTS)

AND WAGES ARE FLEXIBLE

Short-Run Aggregate Supply (SRAS)

PL

GDPR

SRAS

As prices increase Firms produce more for a greater profit

As prices decreasesales will fall, and producers produce less

INPUT COSTS ARE STUCK AT A PRE-DETERMINED LEVEL

HOW TO SHIFT THE SRAS

• INPUT PRICES or COSTS such as WAGES•ECONOMIC GROWTH•GOVERNMENT REGULATION

INCREASE AND DECREASE IN SRAS

DECREASE IN INPUT COSTS

INCREASE IN INPUT COSTS

PL

GDPR

SRASSRAS1P

L

GDPR

SRAS

SRAS1PL

Long-Run Aggregate Supply (LRAS)

PL

GDPR

LRAS

Yf

HOW TO SHIFT THE LRAS LIKE THE PPF

In the Long run, we are operating at Full Potential so…

CHANGE IN TECHNOLOGYCHANGE IN LABOR PRODUCTIVITY

CHANGE IN CAPITAL

THE DIFFERENT MODELS… http://apecon.us/aggregatesupplykeynes

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