Professional Documents
Culture Documents
Nominal GDP
Real GDP =
GDP deflator
100
Example: If nominal GDP is 16,988.3 billion and the GDP deflator is 106.775, what is
real GDP?
16,988.3 billion
Real GDP = = 15,910.37 billion
106.775
100
GDP = Consumer + Gross private + Government + Exports Imports
spending domestic spending
on goods investment on goods
and services and services
GDP = + + + ( )
- If G > T, the fiscal balance is a deficit (spending more than taking in).
- If G < T, the fiscal balance is a surplus (taxing more than spending).
The role of automatic stabilizing:
- As income declines, the deficit grows.
- As income increases, the deficit shrinks or becomes a surplus.
Transfer Interest on
Personal savings = GDP + + Taxes Consumption
payments government debt
IS with an
increase in G
IS
Income (Y)
Y1 Y2 Income (Y)
Price
level
P1
P2
AD
Y1 Y2 Income (Y)
Effects when the central bank increases the money supply
increased aggregate demand
Copyright 2014 CFA Institute 16
AGGREGATE SUPPLY
The aggregate supply (AS) curve represents the level of domestic output that
companies produce at each price.
In the short run,
- Suppliers can change the supply at the current price in the very short term (very
short-run aggregate supply, or VSRAS).
- Suppliers can increase profits by increasing supply in the short run if they are
covering their variable costs (short-run aggregate supply, or SRAS).
The long-run aggregate supply curve is vertical (long-run aggregate supply, or LRAS).
SRAS
LRAS
Price level
VSRAS
Output
Copyright 2014 CFA Institute 17
SHIFTS IN AGGREGATE DEMAND AND
AGGREGATE SUPPLY CURVES
Shifts in aggregate demand result Shifts in aggregate supply result from
from changes in the following: changes in the following:
Household wealth Supply of labor
Consumer and business Human capital (quality of labor)
expectations Supply of natural resources
Capacity utilization Supply of physical capital
Monetary policy (reserves and Productivity and technology
interest rates)
Exchange rate
Growth in global economy
Fiscal policy (taxes and government
spending)
Price LRAS
level SRAS
P1
AD
Income, Output, Y
Price LRAS
level SRAS
P1
P2
AD1
AD2
Y2 Y1 Income, Output, Y
P2
P1
AD2
AD1
Y1 Income, Output, Y
Y2
P2
P1
AD1
Y2 Y1 Income, Output, Y
Physical
Capital
Human
Technology
Capital
Capacity
Labor to Supply Natural
Supply Goods and Resources
Services
= ,
and divide each side by 1/L:
= 1,
Therefore, the productivity relative to labor depends on the level of the labor
force, the level of capital investment, and the mix of labor and capital.