As/Ad Model

Macropolitical economic system Chapter 10 The Aggregate read/Aggregate Supply pose * Keynesian Economics Economists who center onsed on the scant(p) ply * bottom Maynard Keynes their bearing advocate the originator of macroeconomics as a separate discipline from micro * Classical Economists economists who focused on long-run issues such as growth * Aggregate postulate Management governments attempt to control the amass aim of spending in the parsimony * Equilibrium Income the aim of income toward which the economic system gravitates in the short run because of the cumulative cycles of declining or increasing production * Potential Income the birth of income that the economy is technically capable of producing without generating accelerating inflation * Paradox of Thrift and increase in savings can lead to a decrease in expenditures, decreasing end product and causing a recession * Multiplier Model the model that was meant to capture Keynesian economics * Thi s model emphasized aggregate siding fluctuations * Explored why those output fluctuations generally would not lead to wild fluctuations in output drop-offs * Instead lead to smaller fluctuations recessions * The AS/AD Model aggregate affix/aggregate conduct Is a pedagogical model intentional to give a framework to organize thinking about macro economy * Does not focus on problems that occur because of interactions between individuals * Consists of 3 crooks * Short-run aggregate supply (SAS) curve * Aggregate beseech (AD) curve * Long-run aggregate supply (LAS) curve gameyest sustainable level of output * The damage level of all goods is on the vertical axis and the aggregate output is on the horizontal axis * It is a historical model starts at one point in time and says what exit likely conk when diversenesss affect the economy * Aggregate expenditures (demand) the sum of role, investment, government spending, and net exports p. 234 * Discuss the historical deve lopment of macroeconomics * The depression began in the 1930s and lasted 10 years * During he depression output fell by 30% and unemployment rose to 25% * This was the beginning of macros focus on the demand side of economics * Keynes started asking what short run forces were causing the Depression and what society could do to counteract them * This created the framework that focuses on short-run issues such as business cycles and how to stabilize output fluctuations * By the 1950s, Keynesian economics had been true by most economists and taught almost everywhere in the US * In the 1970s inflation became a serious issue which meant that the multiplier model was not very helpful * It assumed that the price level is fixed * The standard model taught in macro then turned to the Aggregate Supply/Aggregate Demand (AS/AD) model * Explain the shape to the aggregate demand curve and what factors trade the curve * Aggregate demand (AD) curve a curve that shows how a switch in price leve l will change aggregate expenditures on all goods and services * It is downward-sloping The reasons for the downward slope are due to the * vex rate effect the effect that a lower price level has on investment expenditures by means of the effect that a change in the price level has on interest rates p. 234 * world(prenominal) effect as the price level falls (assuming the exchange rate does not change), net exports will ride p. 234 * Money wealth effect (real balance effect) a fall in the price level will make the holders of money richer, so they buy more p. 234 * The multiplier effect strengthens each of these effects * Multiplier effect the amplification of initial changes in expenditures p. 235 * Shifts in the AD curve means that at every price level, total expenditures have changed p. 236 * Shift factors of aggregate demand Foreign Income recessions and expansions occurring in different countries cause demand for US goods decreases or increases respectively * Exc hange Rate Fluctuations when a countrys currency loses value, relative to foreign currencies, demand for foreign goods decreases and demand for domestic goods increases exports also increase * dispersion of income * Expectations expectations of future output and future prices * Government Policies spending policy, valuate policy, etc p. 238 * When consumption expenditures increase, the AD curve shifts to the responsibility, when consumption expenditures decrease, the AD curve shifts to the left * Explain the shape of the short-run aggregate supply curve and what factors shift the curve p. 39 * Short-run Aggregate Supply (SAS) curve a curve that specifies how a shift in the aggregate demand curve affects the price level and real output in the short run, other things constant * The curve is upward-sloping which means that other things constant, an increase in output is accompanied by an rise in price level * When aggregate demand increases, the price level rises * Two reason s that the SAS curve slopes upward, other things constant * Upward-sloping curves in auction markets * Firms tendency to increase their markup when demand increases * The shape of the SAS curve reflects two different types of markets * The auction market markets represented by the supply/demand model * Posted-price markets prices are roofy by the producers and change infrequently * Often called Quantity-adjusting Markets markets in which firms respond to changes in demand primarily by changing production instead of changing their prices * Shifts in the SAS curve p. 239 tacks in input prices, such as wages or supply costs * If input prices rise, the SAS curve shifts up, if input prices fall, the SAS curve shifts down * Change in the productivity factors of production * An increase in productivity shifts the curve down * A reducing of input costs per unit of output shifts the curve down * Changes in import prices of final goods * entailment prices are a shift factor because th ey are a component of an economys price level * When import prices rise the SAS curve shifts up * Changes in excise and sales tax * higher(prenominal) sales tax shifts the curve up * How much will the curve shift The percentage change in wages and other factor prices minus changes in productivity * If productivity rises by 3% and wages rise by 7%, we can expect that the price level will rise by 4% for a given level of output * Explain the shape of the long-run aggregate supply (LAS)curve p. 241 * Long-run aggregate supply (LAS)curve a curve that shows the long run relationship between output and the price level * The position of the LAS curve is determined by potential output * expert where to position the curve is somewhat in debate * The range is bounded by a high level of output and a low level of output and the LAS curve can be vox populi of as being the mid-point of that range * The shape of the LAS curve * The LAS curve is vertical At potential output all resources are bei ng fully utilized * A rise in the price level mean that the price of goods and factors of production, including wages, will rise * Show the effects of shifts of the aggregate demand and aggregate supply curves on the price level and output in both the short run and long run p. 243 * Short run equilibrium is where the SAS curve and the AD curve intersect * If the AD curve shifts to the right * footing level will rise * Output will increase * If the SAS curve shifts up * Price level will rise * Output will decrease * Long run equilibrium is where the LAS and AD curves intersect * AD curve can only determine price level, it has no effect on output * If the AD increases, price levels rise Explain how dynamic feedback effects can destabilize the economy p. 246 * * Discuss the limitations of the macro policy model p. 250 * Fiscal policy changing government spending and tax policy is a slow process * Changes cannot be completed in a timely make * Potential output cannot be measured a ccurately * Many other interrelationships that the model does not take into account * Rate of unemployment fluctuates and is difficult to predict * Falling asset prices and falling price level on expectations of aggregate demand * When there are pressures for price levels to fall there are also pressures for asset prices to fall