The Macro Model
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Transcript of The Macro Model
The Macro Model
National Income
Chapter 10
Apple CEO Steve Jobs
Graphing the Macro Model
The vertical axis of the measures the Price Level, rather than Price in the Micro Model
The horizontal axis of the measures Real GDP, rather than quantity of micro model
Price Level = PL Real GDP = RGDP
Long Run Aggregate Supply
The Long Run Aggregate Supply curve represents an economy where all inputs: land, labor and capital are used to their fullest efficiency
The Long Run Aggregate Supply Curve = LRAS
It is similar to the productions possibilities frontier on a production possibilities graph
Real GDP or National Income
The LRAS represents the economy running at “full employment” or the maximum level of national income.
The LRAS often uses Y to represent “full employment” RGDP or maximum National Income
Growth
The LRAS may shift to the right indicating that there has been economic growth of real GDP
This is similar to the shift out in the production possibilities graph
Increases in the LRAS
Growth created with the LRAS leads to increases in RGDP and decreases in price levels
This is a good situation for an economy when it can grow without price rises.
RGDP Contractions
The LRAS may also shrink with a real GDP contraction
This is indicated by the LRAS shifting to the left
This type of shift is called a supply shock
Decreases in the LRAS
Decreases in the LRAS can leads to decreases in Real GDP and increases in Price Levels
This type of inflation is called cost push inflation
What are the four components of Aggregate Demand?
C = Consumption I = Business Investment G = Government Spending NX= Net Exports = exports -
imports
Aggregate Demand
The macro model has a downward sloping aggregate demand curve
The Aggregate Demand = C+I+G+(NX)
Aggregate Demand is abbreviated AD
The place where the AD intersects the LRAS is the price level
Increases in Aggregate Demand
Increases in Aggregate demand lead to increases in price levels, however with the LRAS there is no change in RGDP
These increases are called demand pull inflation
This type of inflation is common during period of economic expansions
Decreases in Aggregate Demand
Decreases in Aggregate Demand lead to lower price levels, however real GDP does not change Real GDP
Decreases in aggregate demand commonly occurs during a contraction or recession
What happens to RGDP if price levels fall?
If price levels fall the RGDP will rise
What happens to RGDP if price levels rise?
If price levels rise the RGDP will fall
Why does the AD curve slope down?
Wealth Effect -(also called Real Balance Effect) if price level rises, people’s purchasing power goes down and if price levels fall people’s purchasing power goes up
Why does the AD curve slope down?
Interest Rate Effect - if prices rise the real value of money goes down, therefore the demand to borrow money increases, driving up interest rates. Conversely if prices fall, interest rates fall.
Why does the AD curve slope down?
Open Economy Effect - if price levels go up our net exports drop; if price levels goes down our net exports increase
What causes increases and decreases Aggregate Demand
Changes in price levels lead to changes in real GDP
There are a variety of non- price factors which can shift the Aggregate Demand curve up and down.
Look at the following examples, and figure out whether they will increase or decrease AD
People begin buying more food, clothing, and cars
Aggregate demand will rise
The federal government reduces military spending
Aggregate demand will fall
Sales tax is eliminated in California
Aggregate demand will rise
Foreign countries buy more US exports
Aggregate demand will rise
The money supply decreases
Aggregate demand will decrease
The US dollar becomes stronger compared to the Euro
Aggregate demand will fall
The Federal Reserve Bank raises interest rates
Aggregate demand will fall
A US company sells a jet to a foreign country
Aggregate Demand will rise
A US company buys coffee beans from Guatemala
Aggregate demand will fall
A drop in the value of the dollar
Aggregate demand will increase
The Federal reserve restricts the money supply
Aggregate demand falls
Interest rates fall
Increase in aggregate demand
Europe and Japan suffers from a Depression
Aggregate Demand falls
China grows rapidly, and buys high tech US products
Aggregate Demand rises
Shifts in Long Run Aggregate Supply Curve
Which side are you on?
Consumer spending increases AD New inventions boost solar energy AS Government cuts back on military budget AD Government raises the retirement age on workers AS Business investment increases AD
Which side are you on?
Retraining of US workers make them more productive
AS New shale oil is discovered in the Rockies AS
Modern Macro Model with Short Run Aggregate Supply Curve
Short Run Aggregate Supply Curve
The short run aggregate supply curve or (SRAS) can shift when there are temporary efficiencies in capital, labor, and land
For example, plants can run at more than a 100% capacity, when they run at night.
Workers can work overtime, thus increasing the productivity of labor
Shifts in the short run Aggregate Supply
Short run increases in the supply curve is the result of:
Labor working overtime More efficient technologies are introduced The costs of labor, land or capital falls
Decreases in the SRAS
The SRAS can also decline if: Natural disasters disrupt the flow of
resources Any increase in the price of the inputs of
production: land, labor, and capital Any fall in the productivity or efficiency of
land,labor,and capital
What impact do each of these have on the SRAS?
New inventions make solar energy more efficiently produced
Increase in the SRAS
What impact do each of these have on the SRAS?
OPEC reduces their production of crude oil by 30%
decrease in the SRAS
What impact do each of these have on the SRAS?
Many people in the labor force take early retirements
decrease in the SRAS
What impact do each of these have on the SRAS?
Education and training for new workers increases sharply
Increase in the SRAS
What impact do each of these have on the SRAS?
Floods in the Midwest destroy 20% of the corn crop
Decrease in SRAS
Your turn
Make up four examples that will effect aggregate demand
Make up two more examples that will effect aggregate supply
Share your list with your neighbor