Aggregate Demand & Supply Chapter 22. Behavior of Aggregate Demand’s Component Parts.
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Transcript of Aggregate Demand & Supply Chapter 22. Behavior of Aggregate Demand’s Component Parts.
Aggregate Demand & Supply
Chapter 22
The aggregate demand curve is downward sloping because
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Y C I G NX
P M P i I Y
P M P i E NX Y
Behavior of Aggregate Demand’s Component Parts
Factors that Shift Aggregate Demand
• An increase in the money supply shifts AD to the right because it lowers interest rates and stimulates investment spending
• An increase in spending from any of the components C, I, G, NX, will also shift AD to the right
Aggregate Supply• Long-run aggregate supply curve
– Determined by amount of capital and labor and the available technology
– Vertical at the natural rate of output generated by the natural rate of unemployment
• Short-run aggregate supply curve– Wages and prices are sticky– Generates an upward sloping SRAS as firms attempt
to take advantage of short-run profitability when price level rises
Factors that Shift SRAS
• Costs of production– Tightness of the labor market– Expected price level– Wage push– Change in production costs unrelated to
wages (supply shocks)
Self-Correcting Mechanism
• Regardless of where output is initially, it returns eventually to the natural rate
• Slow– Wages are inflexible, particularly downward– Need for active government policy
• Rapid– Wages and prices are flexible– Less need for government intervention
Conclusions• Shift in aggregate demand affects output
only in the short run and has no effect in the long run
• Shifts in aggregate demand affects only price level in the long run
• Shift in short run aggregate supply affects output and price only in the short run and has no effect in the long run
• The economy has a self-correcting mechanism