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In this chapter,
look for the answers to these questions:
Short-Run Economic
Fluctuations
Economic activity fluctuates from year to year.
In most years production of goods and services rises.
On average over the past 50 years, production in the
U.S. economy has grown by about 3 percent per year.
In some years normal growth does not occur, causing a
recession.
are
The
shaded
bars are
recessions
quantities fluctuate
together.
Investment
spending,
billions of 2005
dollars
unemployment rises.
Unemployment
rate,
percent of labor
force
The price
level
The model
determines
the eqm
price level
and eqm
output
(real GDP).
SRAS
P1
Aggregate
Demand
Y1
Short-Run
Aggregate
Supply
AD
Y
Aggregate Demand
Aggregate demand is the total demand
for goods and services in the economy.
It is the sum of all expenditure in the
economy over a period of time.
Formula:
AD = C+I+G+(X-M)
C= Consumption Spending
I = Investment Spending
G = Government Spending
(X-M) = difference between spending on imports
and receipts from exports (Balance of Payments)
Consumption Expenditure
Exogenous factors affecting consumption:
Tax rates
Incomes short term and expected income over
lifetime
Wage increases
Credit
Interest rates
Wealth
Property
Shares
Savings
Bonds
Investment Expenditure
Spending on:
Machinery
Equipment
Buildings
Infrastructure
Influenced by:
Government Spending
Defence
Health
Social Welfare
Education
Foreign Aid
Regions
Industry
Law and Order
P2
P1
AD
Y2
Y1
Y=C+I+G+
NX
Assume G fixed
by govt policy.
To understand
the slope of AD,
must determine
how a change in
P affects C, I, and
NX.
P2
P1
AD
Y2
Y1
Price level
Increase in AD
AD2
Decrease in AD
AD3
8-21
AD1
P1
AD1
Y1
Y2
AD2
Y
Changes in I
Firms buy new computers, equipment,
factories
Interest rates, monetary policy
Investment Tax Credit or other tax incentives
Changes in NX
Booms/recessions in countries that buy
our exports
Appreciation/depreciation resulting from
international
speculation
in
foreign
exchange market
Copyright 2004
McGraw-Hill Australia Pty
8-25
Short-Run Aggregate
Supply Curve
Upward sloping and is constructed on
the basis of two assumptions:
a given price level
nominal wages have been established
on the expectations that the given price
level will persist
Copyright 2004
McGraw-Hill Australia Pty
8-26
Short-Run AS
AS1
A2
Price level
P2
A1
P1
P3
Copyright 2004
McGraw-Hill Australia Pty
A3
Q3
QP
Q2
Real gross domestic output
8-27
Aggregate Supply
Inflation
LRAS
Yf
Non-Price Determinants of AS
Changes in input prices
Changes in productivity
Changes in the legal and institutional
environment
Copyright 2004
McGraw-Hill Australia Pty
8-29
Changes in Short-Run AS
AS2
Price level
Decrease in
Short-run AS
0
Real gross domestic output
Copyright 2004
McGraw-Hill Australia Pty
8-30
AS1
Changes in Short-Run AS
AS1
Price level
AS3
Increase in
Short-run AS
0
Real gross domestic output
Copyright 2004
McGraw-Hill Australia Pty
8-31
Price level
The AS curve
P2
Classical range;
No multiplier
effect
price response
only
Intermediate range;
Multiplier reduces as
economy approaches full
employment
P1
Keynesian range;
full multiplier effect
Real domestic product
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Copyright 2004
6-32University of Canberra, Australia
Slides prepared by Muni Perumal,
McGraw-Hill Australia Pty
8-32