Unit 3 - Ch 10- Adjusted

8/9/2019 Unit 3 - Ch 10- Adjusted

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Copyright © 2012 by McGraw-Hill Ryerson

Limited. ll rights reser!ed.

Understanding Economics6th edition

by Mark Lovewell


2/46

UnderstandingEconomics

Chapter 10Economic Fluctuations

Copyright © 2012 by McGraw-Hill Ryerson Limited. ll rights reser!ed.

"th editionby Mar# Lo!ewell


3/46

Learning $b%ecti!es&ter this chapter yo' will be able to(1. identi&y aggregate demand and the

&actors that a)ect it

2. disting'ish aggregate s'pply and the&actors that in*'ence it

+. 'nderstand the economy,s e'ilibri'mand how it di)ers &rom its potential

. de/ne economic growth its so'rces andits impact

. s'mmarie Canada,s historical record o&economic growth

Copyright © 2012 by McGraw-Hill RyersonLimited. ll rights reser!ed.


4/46

ggregate 3emand 4a5 ggregate demand 435(

is the relationship between the general pricele!el and real e6pendit'res 4i.e. total spending5in an economy

is shown as a sched'le or c'r!e



5/46

ggregate 3emand 4b57ig're 10.1 8age 2"1


0 "#0 $00 $#0 %00

&0

%0

120

1"0

200

Aggregate Demand Curve

Real G'( )2002 * billions+

(

r i c e L e ! e l ) G ' ( d e

, l a t o r -

2 0 0 2 . 1 0 0 +

Aggregate DemandSchedule

(riceLe!el

Real G'(

)2002* billions+

(oint onGraph

2001"0120

"#0$00$#0

abc

a

b

c AD


6/46

9he ggregate 3emand

C'r!e 9wo &actors ca'se the aggregate demand

c'r!e to be downward sloping( 9he wealth e)ect means that higher prices

decrease the real !al'e o& /nancial assets anddecrease cons'mption since ho'seholds &eelpoorer 4and !ice !ersa &or lower prices5.

9he &oreign trade e)ect means that higher

prices decrease e6ports and increase imports4and !ice !ersa &or lower prices5.



7/46

Changes in ggregate 3emand 4a5

ggregate demand changes are shown byshi&ts in the 3 c'r!e.n increase in spending ca'ses a rightward

shi&t in the 3 c'r!e.

decrease in spending ca'ses a le&tward shi&tin the 3 c'r!e.



8/46

Changes in ggregate 3emand 4b57ig're 10.2 8age 2"+


0 "#0 $00 $#0 %00

&0

%0

120

1"0

200

Aggregate Demand Curve


( r

i c e L e ! e l ) G ' ( d e ,

l a t o r -

2 0 0 2 . 1 0 0 +

2001"0

120

"#0$00

$#0

$00$#0

%00

Aggregate Demand

Schedule(riceLe!el

Real G'(

)2002 * billions+ '0 '1

AD0 AD1


9/46

ggregate 3emand

7actors 4a5 3 changes are ca'sed by aggregate demand

&actors related to each o& the &o'r mainspending components(cons'mption 4C5 disposable income

wealth 4other than wealth changes ca'sed by a!arying price le!el5

cons'mer e6pectations interest rates



10/46

ggregate 3emand

7actors 4b5in!estment 4:5 interest rates

b'siness e6pectations

go!ernment p'rchases 4G5

net e6ports 4;-M5 &oreign incomes

e6change rates



11/46

:n!estment 3emand 4a5 :n!estment demand is the relationship

between the interest rate and in!estment anddepends on the real rate o& ret'rn and the realinterest rate.


12/46

:n!estment 3emand 4b57ig're 10.+ 8age 2"


0

Investment Demand Curve

/n!estment )2002 * billions+

R e a l R a t e o , R e t r n

a n d

R e a l / n t e r e s t R a t e ) +

0 "0

&

%

12

3 C '

a

b

c

'1

Investment Demand Schedule

RealInterest

Rate

(%)

TotalInvestment

(2002 $ bllons)

!ont on"ra#h

!roectsnderta&en

12

=

0

+0

"0

a

b

c

--

<


13/46

>hi&ts in the ggregate 3emand C'r!e7ig're 10. 8age 2"?


415 n increase in cons'mption d'e to4a5 a rise in disposable income

4b5a rise in wealth 'nrelated to achange in price le!el

4c5 an e6pected rise in prices orincomes

4d5a &all in interest rates425 n increase in in!estment d'e to

4e5 a &all in interest rates4&5 an e6pected rise in pro/ts

4+5 n increase in go!ernmentp'rchases

45 n increase in net e6ports d'e to4g5a rise in &oreign income4h5a &all in !al'e o& the Canadian

dollar

Aggregate demand increases andthe AD curve shifts to the right,with the following:

415 decrease in cons'mption d'e to4a5 a &all in disposable income

4b5 a &all in wealth 'nrelated to achange in price le!el

4c5 an e6pected &all in prices orincomes

4d5 a rise in interest rates425 decrease in in!estment d'e to

4e5 a rise in interest rates4&5 an e6pected &all in pro/ts

4+5 decrease in go!ernmentp'rchases

45 decrease in net e6ports d'e to4g5 a &all in &oreign income4h5 a rise in !al'e o& the Canadian

dollar

Aggregate demand decreasesand the AD curve shifts to theleft, with the following:


14/46

ggregate >'pply 4a5 ggregate s'pply 4>5 is(the relationship between the general price le!el

and real o'tp't in an economy

shown as a sched'le or c'r!e



15/46

ggregate >'pply 4b57ig're 10. 8age 2"=


Aggregate Su##l'Schedule

(riceLe!el

Real G'(

)2002* billions+

(oint onGraph

1201"02002&0

"#0$00$2#$0

abc

d

0 "#0 "$# $00

&0

%0

120

1"0

2&0

Aggregate Su##l' Curve


(

r i c e L e ! e l ) G ' ( d e , l a t o r -

2 0 0 2 . 1 0 0 +

200

$0$2#

a

b

c

d

AS

(otential4tpt


16/46

9he ggregate >'pply

C'r!e 9he > c'r!e is 'pward-sloping beca'se

higher prices enco'rage b'sinesses toprod'ce more while at lower pricesb'sinesses are &orced to red'ce o'tp't.

9he > c'r!e becomes steep abo!e potentialo'tp't beca'se a relati!ely large increase inthe price le!el is re'ired i& b'sinesses are toincrease o'tp't in this range.



17/46

>hort-R'n Changes in ggregate

>'pply >hort-r'n > changes are shown by shi&ts in

the > c'r!e and a constant potential o'tp't&or the economy. short-r'n increase in > occ'rs when the >

c'r!e shi&ts rightward while potential o'tp'tstays constant.

short-r'n decrease in > occ'rs when the >

c'r!e shi&ts le&tward while potential o'tp'tstays constant.



18/46

>hort-R'n Change in ggregate>'pply7ig're 10." page 2"@


0 "#0 "$# $00

&0

%0

120

1"0

2&0



(

r i c e L e ! e l ) G ' ( d e

, l a t o r -

2 0 0 2 . 1 0 0 +

200

$#0$2#

AS0

(otential4tptAS1

1201"0

2002&0

"#0$00

$2#$0

$00$2#

$0$1

Aggregate Su##l'

Schedule(riceLe!el

Real G'(

)2002 * billions+ 50 51


19/46

Long-R'n Changes in ggregate

>'pply Long-r'n > changes are shown by shi&ts in

both the > c'r!e and in potential o'tp't. long-r'n increase in > occ'rs when the >

c'r!e and potential o'tp't both shi&t rightward.

long-r'n decrease in > occ'rs when the >c'r!e and potential o'tp't both shi&t le&tward.



20/46

Long-R'n Change in ggregate>'pply7ig're 10.? 8age 2?0


0 "#0 $2#

&0

%0

120

1"0

2&0



(


2 0 0 2 . 1 0 0 +

200

$$#

6ew(otential4tpt

4riginal(otential4tpt

AS0 AS1

1201"0200

2&0

"#0$00$2#

$0

$00$#0$$#

$%0

Aggregate Su##l'Schedule

(riceLe!el

Real G'(

)2002 * billions+ 50 51


21/46

ggregate >'pply

7actors > changes are ca'sed by aggregate s'pply

&actors related either to short-r'n or long-r'ntrends.>hort-r'n changes in > are ca'sed by !arying

inp't prices.

Long-r'n changes in > are ca'sed by !arying( reso'rce s'pplies

prod'cti!ity

go!ernment policies



22/46

>hi&ts in the ggregate >'pply C'r!e 4a57ig're 10.= 8age 2?1


415 decrease in inp't prices d'e to

4a5 a &all in wages4b5a &all in raw material prices

Aggregate supply increases, withthe AS curve shifting to the right,and potential output staying thesame with the following:

415 n increase in inp't prices d'e to

4a5 a rise in wages4b5 a rise in raw material prices

Aggregate supply decreases withthe AS curve shifting to the left,and potential output staying thesame with the following:


23/46

>hi&ts in the ggregate >'pply C'r!e 4b57ig're 10.= 8age 2?1


415 n increase in s'pplies o& economicreso'rces d'e to

4a5more labo'r s'pply4b5more capital stoc#4c5 more land4d5more entreprene'rship

425 n increase in prod'cti!ity d'e totechnological progress

4+5 change in go!ernment policies

4e5 lower ta6es4&5 less go!ernment reg'lation

Aggregate supply increases, withthe AS curve shifting to the right,and potential output increasingwith the following:

415 decrease in s'pplies o& economicreso'rces d'e to

4a5 less labo'r s'pply4b5 less capital stoc#4c5 less land4d5 less entreprene'rship

425 decrease in prod'cti!ity d'e totechnological decline

4+5 change in go!ernment policies

4e5 higher ta6es4&5 more go!ernment reg'lation

Aggregate supply decreases, withthe AS curve shifting to the left,and potential output decreasingwith the following:


24/46

A'ilibri'm in the

Aconomy 4a5 n economy,s e'ilibri'm occ'rs at the

intersection o& the 3 and > c'r!es. price le!el abo!e e'ilibri'm means an

'nintended increase in in!entories 4or positi!e'nplanned in!estment5 lowering the price le!eltowards e'ilibri'm.

price le!el below e'ilibri'm leads to an

'nintended decrease in in!entories 4or negati!e'nplanned in!estment5 raising the price le!eltowards e'ilibri'm.


A


25/46

n Aconomy atA'ilibri'm7ig're 10.@ 8age 2?+


$00

1"0

0 "#0 %00

&0

%0

120

200


( r i c e L e ! e l ) G ' ( d

e , l a t o r -

2 0 0 2 . 1 0 0 +

$#0

Aggregate Demand and Su##l' Curves

(ositi!e 7nplanned/n!estment

6egati!e 7nplanned/n!estment

Aggregate Demand andSu##l' Schedules(riceLe!el

5 8 ')srpls )9+ or shortage )-++

)2002 * billions+

AS

AD

a a

b

c c

2001"0

120

)$2# 8 "#0+ 9$#

)$00 8 $00+ 0)"#0 8 $#0+ -100


26/46

A'ilibri'm in the

Aconomy 4b5 n economy,s e'ilibri'm occ'rs at a point

where total in%ections 4:BGB;5 e'al totalwithdrawals 4>B9BM5.

hen total in%ections e6ceed total withdrawalsthen real o'tp't and spending e6pand 'ntil anew balance is achie!ed.

hen total withdrawals e6ceed total in%ectionsthen real o'tp't and spending contract 'ntil anew balance is achie!ed.



27/46

n Aconomy at :ts 8otential $'tp't7ig're 10.10 8age 2?"


0

&0

%0

120

1"0

2&0


( r i c e L e ! e l ) G ' ( d

e , l a t o r -

2 0 0 2 . 1 0 0 +

200

$2#

(otential4tpt

AS

AD


28/46

Recessionary and :n*ationary Gaps

recessionary gap(occ'rs when e'ilibri'm o'tp't &alls short o&

potential o'tp't and is associated with an

'nemployment rate abo!e the nat'ral rate n in*ationary gap(occ'rs when e'ilibri'm o'tp't e6ceeds

potential o'tp't and is associated with an

'nemployment rate below the nat'ral rate aswell as increased press're on prices



29/46

Aconomic Growth 4a5 Aconomic growth can be de/ned in two ways( 9he percentage increase in an economy,s total

o'tp't 4e.g. real G385 is most appropriate when

meas'ring an economy,s o!erall prod'cti!ecapacity.

9he percentage increase in per capita o'tp't4e.g. per capita real G385 is most appropriate

when meas'ring li!ing standards.



30/46

Aconomic Growth 4b5 Aconomic growth can also be portrayed 'sing

the prod'ction possibilities c'r!e in two ways(an o'tward shi&t in the prod'ction possibilities

c'r!e d'e to technological change or anincrease in economic reso'rces

a mo!ement towards the c'r!e beca'se not allreso'rces ha!e been employed or 'sed to their

&'llest capacity



31/46

9he R'le o& ?2 9he R'le o& ?2(shows the e)ects o& e6ponential growth

states that the n'mber o& years it ta#es a!ariable to do'ble can be estimated by di!iding?2 by the !ariable,s ann'al percentage change



32/46

>o'rces o& Aconomic Growth 4a5

main ca'se o& growth in Canada,s realo'tp't is the increase in the 'antity o&labo'r.

Growth in per capita o'tp't is closelyassociated with growth in labo'r prod'cti!itywhich depends on si6 &actors(the 'antity o& capital

technological progressthe 'ality o& labo'reDciency in prod'ction



33/46

>o'rces o& Aconomic Growth 4b5

the 'antity o& nat'ral reso'rces

social and political &actors



34/46

9he


35/46

9he Costs o& Growth 9here are three main disad!antages o&

economic growth(its opport'nity cost in terms o& sacri/ced

c'rrent cons'mption

its en!ironmental costs

its social costs


C d , A i


36/46

Canada,s AconomicGrowth 4a57ig're 10.1" 8age 2=?



37/46


38/46

9he


39/46

Contractions contraction(is 's'ally ca'sed by a decrease in 3 magni/ed

by the reactions o& both ho'seholds and

b'sinesses who spend less d'e to pessimismabo't the &'t're

may be a recession which is a decline in realo'tp't &or si6 months or more

may be a depression which is a partic'larlylong and harsh period o& red'ced real o'tp't



40/46

A6pansions n e6pansion is 's'ally ca'sed by an increase

in 3 magni/ed by the reactions o& bothho'seholds and b'sinesses as they spend

more d'e to more optimistic e6pectations o&the &'t're.


A6pansion and


41/46

A6pansion andContraction7ig're 10.1= 8age 2@0


0 $00 $2#

1"0

2&0


(


2 0 0 2 . 1 0 0 +

$0

e

f

AS

AD0(otential4tpt

AD1

/n,lationaryGap

RecessionaryGap


42/46

Aconomic 3e!elopment 4$LC5

9he orld,s Rich and 8oor 9he orld @@" to 121@5

low-income co'ntries 4F> @@ or less5



43/46

Aconomic 3e!elopment 4$LC5 9he icio's Cycle o& 8o!erty7ig're C


Low percapita income

Low prod'cti!itygrowth

Low in!estment in capitaland h'man reso'rces

Rapid pop'lationgrowth

Labo'r-intensi!eprod'ction


44/46


>trategies &or 3e!elopment 4a5


45/46


>trategies &or 3e!elopment 4b5

Unit 3 - Ch 10- Adjusted

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