1 chapter 19 aggregate demand and aggregate supply principles of economics by fred m gottheil...

1

Chapter 19Chapter 19Chapter 19Chapter 19

Aggregate Demand and Aggregate SupplyAggregate Demand and Aggregate Supply Principles of Economics

by Fred M GottheilPowerPoint Slides prepared by Ken Long

04/19/23

©©1999 South-Western College Publishing

2

What is theWhat is theBusiness Cycle?Business Cycle?

What is theWhat is theBusiness Cycle?Business Cycle?

Alternating periods of growth and decline in an economy’s GDP


3

Aggregate Output

Time

The Business Cycle

PeakTrough

3

4

What are the four stages What are the four stages of the Business Cycle?of the Business Cycle?

What are the four stages What are the four stages of the Business Cycle?of the Business Cycle?


• trough• expansion• peak• recession

5

Aggregate Output

Time

The Business Cycle

PeakTrough

5

6

Aggregate Output The Business Cycle

6Time

Recession

Trough

Expansion

Peak

7

What is a Recession?What is a Recession?What is a Recession?What is a Recession?A phase in the business cycle

in which the decline in the economy’s real GDP persists for at least 6 months


8

What is a Depression?What is a Depression?What is a Depression?What is a Depression?A severe recession


9

What is Prosperity?What is Prosperity?What is Prosperity?What is Prosperity?A phase in the business cycle

marked by a relatively high level of real GDP, full employment, and inflation


10

What is Inflation?What is Inflation?What is Inflation?What is Inflation?An increase in the price level


11

How do we measure How do we measure Economic Growth?Economic Growth?

How do we measure How do we measure Economic Growth?Economic Growth?

Gross Domestic Product


12

What isWhat isGross Domestic Product?Gross Domestic Product?

What isWhat isGross Domestic Product?Gross Domestic Product?GDP is the total value of all

final goods and services measured in current market prices, produced in the economy in any one year


13

What is a Final Good?What is a Final Good?What is a Final Good?What is a Final Good?A good that is not itself used

to produce other goods


14

What does “measured What does “measured in current market in current market prices” mean? prices” mean?

What does “measured What does “measured in current market in current market prices” mean? prices” mean?

The year in which the good was made, the current market price


15

What does “produced in What does “produced in the economy” mean?the economy” mean?

What does “produced in What does “produced in the economy” mean?the economy” mean?

It is produced domestically


16

For the latest measure For the latest measure of GDP visit -of GDP visit -

For the latest measure For the latest measure of GDP visit -of GDP visit -

http://www.whitehouse.gov/fsbr/esbr.html

http://www.bea.doc.gov




http://www.bea.doc.gov/

17

How do we make How do we make adjustments for prices?adjustments for prices?

How do we make How do we make adjustments for prices?adjustments for prices?

We measure both Nominal and Real GDP


18

What is Nominal GDP?What is Nominal GDP?What is Nominal GDP?What is Nominal GDP?GDP measured in terms of

current market prices - it is not adjusted for inflation


19

What is Real GDP?What is Real GDP?What is Real GDP?What is Real GDP?GDP adjusted for changes

in the price level


20

What is a Base Year?What is a Base Year?What is a Base Year?What is a Base Year?The reference year with

which prices in other years are compared in a price index


21

What is the Price Level?What is the Price Level?What is the Price Level?What is the Price Level?A measure of prices in one

year expressed in relation to prices in a base year


22

What is the Consumer What is the Consumer Price Index?Price Index?

What is the Consumer What is the Consumer Price Index?Price Index?

A measure comparing the prices of consumer goods and services that a household typically purchases compared to a base year


23

What is the value of the What is the value of the index in the base year?index in the base year?

100©©1999 South-Western College Publishing

24

If nominal GDP is $750 If nominal GDP is $750 billion and the price billion and the price index for that year is index for that year is

1.11, then real GDP =1.11, then real GDP =$750/1.11 (or) $675.68


25

What is the Consumer What is the Consumer Price Index (CPI)?Price Index (CPI)?

A measure over time of the cost of a fixed ‘market basket’ of consumer goods and services


26

How does the GDP How does the GDP index compare with the index compare with the

CPI index?CPI index?GDP uses a different basket

of goods and services each year whereas the CPI uses a fixed basket determined in the base year


27

For the latest measure For the latest measure of CPI visit -of CPI visit -

For the latest measure For the latest measure of CPI visit -of CPI visit -

http://stats.bls.gov/cpihome.htmhttp://woodrow.mpls.frb.fed.us/economy/calc/hist1913.html


http://stats.bls.gov/cpihome.htm

http://woodrow.mpls.frb.fed.us/economy/calc/hist1913.html

http://woodrow.mpls.frb.fed.us/economy/calc/hist1913.html

28

What is theWhat is theGDP Price Deflator?GDP Price Deflator?

What is theWhat is theGDP Price Deflator?GDP Price Deflator?

A measure comparing the prices of all goods and services produced in the economy during a given year to the prices of those goods and services purchased in a base year


2929


Real GDP = Nominal GDP x 100

GDP Deflator

30

For current and historical For current and historical data on production -data on production -

For current and historical For current and historical data on production -data on production -

http://www.bog.frb.fed.us/releaseshttp://www.census.gov


http://www.bog.frb.fed.us/releases

31

What isWhat isAggregate Demand?Aggregate Demand?

What isWhat isAggregate Demand?Aggregate Demand?

The total quantity of goods and services demanded by households, firms, foreigners, and government at varying price levels


32

AD

32Real GDP

Price Level

33

What factors can explain What factors can explain the downward slope of the downward slope of Aggregate Demand?Aggregate Demand?

What factors can explain What factors can explain the downward slope of the downward slope of Aggregate Demand?Aggregate Demand?

• Real wealth effect• Interest rate effect• International trade effect


34

Real Wealth EffectReal Wealth EffectReal Wealth EffectReal Wealth Effect

As the price level rises, real purchasing power of some assets declines, thus may reduce spending

35

Interest Rate EffectInterest Rate EffectInterest Rate EffectInterest Rate Effect

A rise in the price level can raise interest rates, leading to less consumption and investment spending

36

International Trade International Trade EffectEffect

International Trade International Trade EffectEffect

A rise in domestic prices relative to foreign prices will reduce exports, raise imports

37

What factors can cause a What factors can cause a shift in Aggregate shift in Aggregate

Demand? A change in ... Demand? A change in ...


Demand? A change in ... Demand? A change in ... • government spending• taxes• income abroad• expectations


38

What isWhat isAggregate Supply?Aggregate Supply?

What isWhat isAggregate Supply?Aggregate Supply?

The total quantity of goods and services that firms are willing to supply at varying price levels


39

What is the Shape of the What is the Shape of the AS curve?AS curve?

What is the Shape of the What is the Shape of the AS curve?AS curve?

Very controversial, different ways of viewing AS curve

40

One type of AS curve, 3 One type of AS curve, 3 sections to itsections to it

One type of AS curve, 3 One type of AS curve, 3 sections to itsections to it

Horizontal sectionUpward sloping sectionVertical section

41

AggregateAggregate Supply Curve Supply Curve

ASPrice level

Real GDP 41

42

Why is Aggregate Why is Aggregate Supply perfectly vertical Supply perfectly vertical at higher levels of GDP?at higher levels of GDP?

Why is Aggregate Why is Aggregate Supply perfectly vertical Supply perfectly vertical at higher levels of GDP?at higher levels of GDP?

Because all resources are fully employed beyond some level of GDP


43

Why is the Aggregate Why is the Aggregate Supply Curve horizontal Supply Curve horizontal at low levels of GDP?at low levels of GDP?

Why is the Aggregate Why is the Aggregate Supply Curve horizontal Supply Curve horizontal at low levels of GDP?at low levels of GDP?Because so many

resources are not used or are under utilized


44

Why is the AS Curve Why is the AS Curve upward sloping at higher upward sloping at higher

levels of GDP?levels of GDP?

Why is the AS Curve Why is the AS Curve upward sloping at higher upward sloping at higher

levels of GDP?levels of GDP?Because we have run out of

some resources so an increase in demand causes those prices to increase


45

AggregateAggregate Supply Curve Supply Curve

ASPrice level

Real GDP 45

46

What is What is Macroequilibrium?Macroequilibrium?

What is What is Macroequilibrium?Macroequilibrium?

The level of real GDP and the price level that equate the aggregate quantity demanded and the aggregate quantity supplied


47

Shifts in the AD CurveShifts in the AD Curve

ASPrice level

Real GDP

47

AD1

AD2

Q1 Q2

P1

P2

48

Will any increase in Will any increase in demand cause inflation?demand cause inflation?

No! It depends on where the aggregate demand curve falls on the aggregate supply curve


49

AggregateAggregate Supply Curve Supply CurveASPrice

level

Real GDP 49

AD1

AD2

AD3

AD4

50

Shifts in the AS CurveShifts in the AS Curve

AS1Price level

Real GDP

50

AD1

Q1

P1

P2

AS2

Q2

51


Supply? A change in ...Supply? A change in ...


Supply? A change in ...Supply? A change in ...• resource availability• wages• interest rates• rents


52

What is an example of What is an example of AD moving along a AD moving along a

horizontal AS Curve?horizontal AS Curve?

What is an example of What is an example of AD moving along a AD moving along a

horizontal AS Curve?horizontal AS Curve?Roosevelt’s New Deal

programs in the 1930’s and war related spending after 1939


53

What is an example of What is an example of AD moving along a AD moving along a positive AS Curve?positive AS Curve?

What is an example of What is an example of AD moving along a AD moving along a positive AS Curve?positive AS Curve?

Spending on the Viet Nam War in the 1960’s


54

What isWhat isDemand Pull Inflation?Demand Pull Inflation?

What isWhat isDemand Pull Inflation?Demand Pull Inflation?Inflation caused primarily

by an increase in aggregate demand


55

What is an example of What is an example of a decrease in a decrease in

Aggregate Supply?Aggregate Supply?

What is an example of What is an example of a decrease in a decrease in

Aggregate Supply?Aggregate Supply?The OPEC legacy

of the 1970’s


56

What isWhat isCost-Push Inflation?Cost-Push Inflation?

What isWhat isCost-Push Inflation?Cost-Push Inflation?

Inflation cause primarily by a decrease in aggregate supply


57

What other problem can What other problem can Cost-Push Inflation cause?Cost-Push Inflation cause?What other problem can What other problem can

Cost-Push Inflation cause?Cost-Push Inflation cause?Unemployment


58

What is Stagflation?What is Stagflation?What is Stagflation?What is Stagflation?A period of stagnating

real GDP, inflation, and relatively high levels of unemployment


59

For current wealth and For current wealth and income data -income data -

For current wealth and For current wealth and income data -income data -

http://www.whitehouse.gov/fsbr/income.html

http://www.bea.doc.gov


60

• What is a Recession?• What is a Depression?• What are the four stages of the

Business Cycle?• What is Gross Domestic Product?• What is Nominal GDP?• What is Real GDP?

61

•What is the Consumer Price Index?•What is the GDP Price Deflator?•What is Aggregate Demand?•What is Aggregate Supply?•What is Macroequilibrium?•What is Stagflation?

1 chapter 19 aggregate demand and aggregate supply principles of economics by fred m gottheil...

Documents