aggregate demand ad=cigxn. ad =cigxnconsumption main determinant is income other determinants: –...
TRANSCRIPT
Aggregate Demand
AD=CIGXn
AD =CIGXn Consumption• Main determinant is income
• Other determinants: – Wealth (value of assets) if W C S – Expectations (for TT% or future wealth)– Debts (if D increases, C & S will decrease)– Taxes (if T increase, C & S decrease, etc)
AD =CIGXn InvestmentInvestment is:–Business spending for capital stock–Most volatile component of AD/GDP–Assumed to require a loan–Decisions are based on
MC (i%) vs. MB(exp Rate of Ret)
AD =CIGXn Government Spending
• More Government Spending (AD)• Less Government Spending (AD)
AD =CIGXn Net Exports
• Xn are sensitive to: TrIPS– Taste/real interest rates/Investment/Price level/Speculation
SID = More M and Fewer X = (AD )
WES = Fewer M and More X = (AD )
LUKE, Use the FOREX
Changes (Δ) in AD• Δ Consumption (C)– C↑ .: AD .: GDPR↑ & PL↑ .: u%↓ & π%↑– C↓ .: AD .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Gross Private Investment (IG)– IG↑ .: AD .: GDPR↑ & PL↑ .: u%↓ & π%↑– IG↓ .: AD .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Government Spending (G) – G↑ .: AD .: GDPR↑ & PL↑ .: u%↓ & π%↑– G↓ .: AD .: GDPR↓ & PL↓ .: u%↑ & π%↓
• Δ Net Exports (XN)– XN↑ .: AD .: GDPR↑ & PL↑ .: u%↓ & π%↑– XN↓ .: AD .: GDPR↓ & PL↓ .: u%↑ & π%↓
Increase in AD
C↑, IG↑, G↑ and/or XN↑ .: AD .: GDPR↑ & PL↑ .: u%↓ & π%↑
GDPR
PL
AD
SRASLRAS
YF
P
Y
AD1
P1
Decrease in AD
C↓, IG↓, G↓ and/or XN↓ .: AD .: GDPR↓ & PL↓ .: u%↑ & π%↓
GDPR
PL
AD
SRAS
LRAS
YF
P
Y
AD1
P1
If the G has a balanced budget
• They are spending = to taxes collected• If they increase spending and don’t have a
balanced budget = borrowingIt will come from the loanable funds
market, therefore raising the r% by crowding us out.
If AD goes down
• Transfer payments will increase b/c the increase in u% will lead to more people applying for welfare and other benefits.
Extra determinates of AD
• ’▲ s consumer confidenceif we have optimism then AD>
• ’▲ s in wealth – assets value > then AD >• ’▲ s monetary policy – if the Fed > MS then AD>
AD Summary
• AD reflects an inv rel beetw PL and GDPR
• Δ in PL creates real-balance, i%, and foreign purchase effects that explain AD’s downward slope
• Δ in C, IG, G, XN cause Δ in GDPR bc they Δ AD.• Increase in AD = AD • Decrease in AD = AD
Full Employment• Full Employment equilibrium exists where AD
intersects SRAS & LRAS at the same point.
GDPR
PL
AD
SRASLRAS
YF
P
Recessionary Gap• A recessionary gap exists when equilibrium occurs
below full employment output.
GDPR
PL
AD
SRASLRAS
YF
P
Y
Inflationary Gap• An inflationary gap exists when equilibrium occurs
beyond full employment output.
GDPR
PL
AD
SRASLRAS
YF
P
Y
Increase in AD = Up/left movement along SRPC
C↑, IG↑, G↑ and/or XN↑ .: AD .: GDPR↑ & PL↑ .: u%↓ & π%↑ .: up/left
along SRPC
GDPR
PL
AD
SRASLRAS
YF
P
Y
AD1
P1
SRPC
π
u
π%
u%un
π 1
. .. .
Decrease in AD = Down/right along SRPC
C↓, IG↓, G↓ and/or XN↓ .: AD .: GDPR↓ & PL↓ .: u%↑ & π%↓ .: down/right
along SRPC
GDPR
PL
AD
SRAS
LRAS
YF
P
Y
AD1
P1
u%
π%
SRPC
un
π
u
π1
. .. .
Other Details:RATCHET EFFECT (or “sticky wages”)– Prices don’t always go down when AD shifts left due
to: wage contracts, worker morale, minimum wage laws, “menu costs” – costs to change prices up & down frequently & fear of “price wars” with competition.
SHORT RUN – period when wages & other costs are FIXED (suppliers need time to adjust to change in AD/AS)