Bài giảng Macroeconomics - Chapter 20: Aggregate Demand, Aggregate Supply, and Stabilization Policy

Chapter 20: Aggregate Demand, Aggregate Supply, and Stabilization PolicyDefine the aggregate demand curve, explain why it slopes downward, and explain why it shiftsDefine the aggregate supply curve, explain why it slopes upward, and explain why it shiftsShow how the aggregate demand and supply curves determine output and the price level in both the short run and the long runAnalyze how the economy adjusts to expansionary and recessionary gaps, and relate this to the concept of a self-correcting economyExplain how stabilization policy can be used to close output gapsAggregate Demand and Aggregate Supply Analyze fluctuations in both output and the price levelShort run and long run analysisPrice level and output on the axisAD shows the relationship between planned spending and the price levelAS shows how output produced by firms depends on the price levelPotential output is shown to measure output gapsPrice level P Output YAggregateDemand (AD)AggregateSupply (AS)Y*Long-Run EquilibriumIn the long run, Actual output equals potential outputActual price level equals expected price levelLong-run equilibrium occurs at the intersection ofAggregate demand Aggregate supply andPotential outputPrice level POutput YAggregateDemand ADAggregateSupply ASY*Short-Run EquilibriumShort-run equilibrium occurs when the AD and AS curves intersect at a level of output different from Y*Point A in the graphShort-run equilibrium is temporaryCaused by a shift in either AD or ASPrice level POutput YADASY*Y1P1AThe Aggregate Demand CurveThe aggregate demand curve shows the amount of output consumers, firms, government, and customers abroad want to purchase at each price levelAll else the sameSlopes downwardsA higher price level reduces planned aggregate expenditure which reduces output via the multiplier effectPC, Ip,NX PAE  Y The Aggregate Demand CurveAn increase in the price level reduces planned aggregate expenditure for three reasons:The wealth effectThe interest rate effectThe exchange rate effectAccording to the wealth effect a higher price level reduces the real value of assetsFinancial assetsDurable assets like housesOutput YAD Price level PThe Aggregate Demand CurveAccording to the interest rate effect a higher price level causesAn increase in money demandAn increase in the interest rate given money supply is fixedA decrease in planned consumption and planned investmentP MD r C, Ip  The Aggregate Demand CurveAccording to the exchange rate effect a higher price level causesHigher interest rates which make our financial assets more attractiveAn increase in the demand for dollarsAn increase in the value of the dollarA decrease in net exportsP r D $ NX  Shifts in the Aggregate Demand CurveA shift of the aggregate demand curve is called a change in aggregate demandAt the given price level, something causes output to rise (an increase in aggregate demand) or fall (a decrease in aggregate demand)Two main causes:Demand shocksStabilization policyShifts in the Aggregate Demand CurveDemand shocks are changes in planned spending not caused by a change in output or a change in price levelConsumer confidenceConsumer wealthBusiness confidenceOpportunities for firms to purchase new technologiesForeign demand for US goodsOutput (Y)ADAD'Price level PShifts in the Aggregate Demand CurveStabilization policies are government policies used to affect planned aggregate expenditure and eliminate output gapsFiscal policyChange in government spending or taxesMonetary policyChange in the nominal money supply which changes the interest rateOutput (Y)ADAD'Price level PThe Aggregate Supply CurveThe aggregate supply curve (AS) shows the relationship between the amount of output firms want to produce and the price levelHolds all other factors constantThe aggregate supply curve is upward slopingAn increase in aggregate demand will increase the willingness to supply and increase the price levelIn past chapters firms met demand at present pricesHolds in the very short runNot possible to indefinitely hold price constant and increase outputThe Aggregate Supply CurveThe expected price level is the price level that is expected to prevail when the economy is producing at potential outputThis is point AFirms sell the usual amountAn increase in aggregate demand will move the economy to point BThe AS curve is upward slopingPrice level POutput YAggregateSupply (AS)P2Y1BY2P3CY*PeAShifts in the AS CurveA change in aggregate supply is a shift of the aggregate supply curveAn increase in aggregate supply is a rightward shift of the curveA decrease in aggregate supply is a leftward shift of the curveThree main causesPrice level POutput YAS1Y*P1AS2Shifts in the AS CurveIncreasing available resources and technology will shift the AS curve to the rightSupply more output without having to increase priceHire more labor, capital, or natural resourcesUse existing labor and machines more efficiently Price level POutput YAS2Y2P1AS1Y1Shifts in the AS CurveAn increase in the expected price level shifts the AS curve upwardsTo maintain profit, increase priceAn increase in the expected price level will increase costs in the future Price level POutput YAS1Pe1Pe2AS2Y1Shifts in the AS CurveA price shock is a change in an input price that is not caused by a change in output or the price levelNegative price shock : AS shifts leftPositive price shock : AS shifts rightA sudden rise in the price of oil increases prices of Gasoline, diesel fuel, jet fuel, heating oilGoods made with oil (synthetic rubber, plastics, etc.)OPEC reduced supplies in 1973; price of oil quadrupledFood shortages occurred at the same timeSharp increase in inflation in 1974Understanding Business CyclesThe economy is in long run equilibrium at P1 and Y*Aggregate demand shifts from AD1 to AD2Positive demand shockIncrease in government spendingDecrease in taxesExpansionary gapThe dot-com bubble from 1995 – 2000Price level POutput (Y)AD1AS1Y*P1AD2P2Y2Understanding Business CyclesThe economy is in long run equilibrium at P1 and Y*Aggregate demand shifts from AD1 to AD2Negative demand shockDecrease in government spendingIncrease in taxesRecessionary gapThe great recessionPrice level POutput (Y)AD1AS1Y*P1AD2P2Y2Understanding Business CyclesThe economy is in long run equilibrium at P1 and Y*AS shifts from AS1 to AS2Negative supply shockOil price shock1973-4 price of oil tripled1979 price of oil doubled2007-2008 price of oil doubledRecessionary gap Price level (P)Output YADAS1Y2Y*AS2P1AP2An Expansionary GapInitial short-run equilibrium at AAD is stable as long as there is no change in government policy or exogenous spendingPrice level is below theexpected price levelFirms are charging less and selling more than plannedRaise nominal pricesShifts AS curve to AS2Output is at potential, Y*Price level POutput YADAS1Y*Y1AS2P1APeA Recessionary GapInitial equilibrium is at AAD curve remains stable unless government policy or exogenous spending changesPrice level is higher than the expected price levelFirms are charging more and selling less than plannedAggregate supply shiftsto AS2Long-run equilibriumPrice level POutput YADAS1Y*Y1P1APeAS2Self-Correcting EconomyIn the long-run the economy tends to be self-correctingMissing from Keynesian modelKeynesian model is short-run; no price adjustmentsGiven time, output gaps disappear without any changes in monetary or fiscal policyWhether stabilization policies are needed depends on the speed of the self-correction processIf the economy returns to potential output quickly, stabilization policies may be destabilizingThe greater the gap, the longer the adjustment period