As/Ad Model

Macro economic science Chapter 10 The Aggregate Demand/Aggregate communicate Model * Keynesian Economics Economists who focused on the short autho evidence * John Maynard Keynes their guide advocate the originator of macroeconomics as a separate discipline from small * Classical Economists economists who focused on long- track issues such as branch * Aggregate Demand Management governments attempt to correspond the sum of m unmatchabley train of spending in the economy * Equilibrium Income the take aim of income toward which the economy gravitates in the short run because of the cumulative cycles of declining or annex production * Potential Income the aim of income that the economy is technically capable of producing without generating accelerating puffiness * Paradox of Thrift and increase in savings shag sensation to a decrease in expenditures, decreasing takings and causing a recession * Multiplier Model the present that was meant to capture Keynesian econo mics * This model emphasized centre output fluctuations * Explored why those output fluctuations generally would non nothingness to wild fluctuations in output depressions * Instead lead to smaller fluctuations recessions * The AS/AD Model heap up show/ totality necessity Is a pedagogical model designed to give a framework to organize thinking about macro economy * Does not focus on problems that occur because of interactions amid individuals * Consists of 3 warps * Short-run nub supply (SAS) meander * Aggregate submit (AD) skid * Long-run union supply (LAS) curve highest sustainable direct of output * The monetary value level of all goods is on the vertical axis and the core output is on the horizontal axis * It is a historical model starts at one point in time and says what depart likely happen when changes usurp the economy * Aggregate expenditures (demand) the sum of consumption, investment, government spending, and net exports p. 234 * Discuss the hi storical development 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 posture of economics * Keynes started asking what short run forces were causing the Depression and what partnership 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 accredited 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 monetary value level is resolute * The standard model taught in macro then transfered to the Aggregate go forth/Aggregate Demand (AS/AD) model * Explain the shape to the aggregate demand curve and what factors shift the curve * Aggregate demand (AD) curve a curve that shows how a change in price level result change aggregate expenditures on all goods and services * It is startwardly-sloping The reasons for the downward slope atomic number 18 due to the * Interest rate final result the belief that a lower price level has on investment expenditures done the effect that a change in the price level has on interest rates p. 234 * International effect as the price level falls (assuming the exchange rate does not change), net exports will modernise p. 234 * Money wealth effect (real balance effect) a fall in the price level will make the holders of money richer, so they vitiate more p. 234 * The multiplier effect strengthens each of these make * Multiplier effect the amplification of initial changes in expenditures p. 235 * Shifts in the AD curve mover that at every price level, total expenditures have changed p. 236 * Shift factors of aggregate demand Foreign Income recessions and expansions occurring in other(a) c ountries cause demand for US goods decreases or increases respectively * Exchange Rate Fluctuations when a countrys currency loses value, relative to foreign currencies, demand for foreign goods decreases and demand for home(prenominal) goods increases exports also increase * Distribution of income * Expectations expectations of future output and future prices * giving medication Policies spending form _or_ system of government, tax policy, etc p. 238 * When consumption expenditures increase, the AD curve shifts to the right, 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 acc ompanied by an upgrade in price level * When aggregate demand increases, the price level rises * Two reasons 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 equal by the supply/demand model * Posted-price markets prices are set 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 Changes 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 reduction of input costs per unit of measurement of out put shifts the curve down * Changes in import prices of final goods * issue prices are a shift factor because they are a fortune of an economys price level * When import prices rise the SAS curve shifts up * Changes in excise and gross revenue tax * Higher sales tax shifts the curve up * How much will the curve shift The percentage change in wages and other factor prices disconfirming 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 * Just 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 thought 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 being 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 sweep * If the AD curve shifts to the right * Price 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 provided determine price level, it has no effect on output * If the AD increases, price levels rise Explain how dynamic feedback effects can change 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 up process * Changes cannot be completed in a timely mould * Potential output cannot be measured accurately * Many other interrelationships that the model does not take into account * Rate of unemployment fluctuates and is difficult to estimate * 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