N.

GREGORY MANKIW
PRINCIPLES OF

ECONOMICS
MACROECONOMICS
Eight Edition
Sixth Edition

CHAPTER
Aggregate Demand
5 and Aggregate Supply
Premium PowerPoint Slides by:
V. Andreea CHIRITESCU
Eastern Illinois University
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management system for classroom use.
 Look for the answers to these questions:
• Why does the Aggregate-Demand curve slope
downward? What shifts the AD curve?
• What is the slope of the Aggregate-Supply curve in
the short run? In the long run? What shifts the AS
curve(s)?
• How does the model of aggregate demand and
aggregate supply explain economic fluctuations?

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 2
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 Outline
• Aggregate demand (AD) curve
• Aggregate supply (AS) curve
– Long-run AS curve
– Short-run AS curve
• Analyzing economic fluctuation

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 Introduction
• Real GDP over the long run
– Grows about 3% per year on average
• GDP in the short run
– Fluctuates around its trend
• Recessions (suy thoái)
– Periods of falling real incomes and rising unemployment/
Giai đoạn thu nhập thực tế giảm và thất nghiệp gia tang.
• Depressions (Khủng hoảng)
– Severe recessions (very rare)/ Suy thoái nghiêm trọng

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 Classical Economics—A Recap
• Classical economics:
– The Classical Dichotomy, the separation of
variables into two groups:
• Real – quantities, relative prices
• Nominal – measured in terms of money
– The neutrality of money: Changes in the money
supply affect nominal but not real variables

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 Classical Economics—A Recap
• Classical theory
– Describes the world in the long run, but not the
short run/ Mô tả thế giới trong dài hạn, không
phải trong ngắn hạn
• In the short run
– Changes in nominal variables (like the money
supply or P ) can affect real variables (like Y or
the u-rate)/ Thay đổi biến danh nghĩa (như cung
tiền hoặc P) có thể ảnh hưởng biến thực
– We use a new model…

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 6
management system for classroom use.
 Look for the answers to these questions:
• Why does the Aggregate-Demand curve slope
downward? What shifts the AD curve?
• What is the slope of the Aggregate-Supply curve in
the short run? In the long run?
What shifts the AS curve(s)?
• How does the model of aggregate demand and
aggregate supply explain economic fluctuations?

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 7
management system for classroom use.
 Model of Aggregate Demand and Aggregate Supply

P “Short-Run
The price Aggregate Supply”
level
SRAS

The model P1
determines the
equilibrium AD
price level “Aggregate
Demand”
Y
Y1
and equilibrium Real GDP, the
output (real GDP). quantity of output
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 The Aggregate-Demand (AD) Curve (Đường tổng cầu)

The AD curve
shows the quantity of P
all goods and
services demanded P2
in the economy at
any given price level/
Cho biết lượng cầu P1
hàng hoá và dịch vụ AD
trong nền kinh tế tại
Y
mỗi mức giá cho Y2 Y1
trước
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 Why the AD Curve Slopes Downward

Y = C + I + G + NX
P
Assume G is fixed
by government P2
policy
To understand the
slope of AD, must
P1
determine how a
change in P affects AD
C, I, and NX. Y
Y2 Y1

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 The Wealth Effect (P and C )
• Hiệu ứng của cải
• Suppose the price level, P, declines
– Increase in the real value of money
– Consumers are wealthier
– Increase in consumer spending, C
– Increase in quantity demanded of goods and
services
Mức giá thấp hơn làm tăng của cải thực, kích
thích chi tiêu tiêu dùng.

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 The Interest-Rate Effect (P and I)
• Hiệu ứng lãi suất
• Suppose the price level, P, declines
– Decrease in the interest rate (explained later)
– Increase spending on investment goods, I
– Increase in quantity demanded of goods and
services
Mức giá thấp hơn làm giảm lãi suất, kích thích chi
tiêu đầu tư

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 The Exchange-Rate Effect
(P and NX )
• Hiệu ứng tỷ giá hối đoái
• Suppose the U.S. price level, P, declines
– Decrease in the interest rate
– U.S. dollar depreciates
– Stimulates U.S. net exports, NX
– Increase in quantity demanded of goods and
services
Mức giá thấp hơn khiến giá trị thực của đồng nội
tệ trên thị trường ngoại hối giảm, kích thích chi
tiêu cho xuất khẩu ròng.
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 The Slope of the AD Curve: Summary
An increase in P
reduces the quantity P
of goods and
services demanded P2
because:
• the wealth effect
(C falls)
• the interest-rate P1
effect (I falls) AD
• the exchange-rate
Y
effect (NX falls) Y2 Y1

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 Why the AD Curve Might Shift

Any event that changes

C, I, G, or NX—except P
a change in P—will shift
the AD curve.

Example: P1
A stock market boom
makes households feel AD2
wealthier, C rises, AD1
the AD curve shifts right. Y
Y1 Y2

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management system for classroom use.
 Why the AD Curve Might Shift
• Changes in C
– Stock market boom/crash
– Preferences re: consumption/saving tradeoff
– Tax hikes/cuts
• Changes in I
– Firms buy new computers, equipment, factories
– Expectations, optimism/pessimism
– Interest rates,
– Monetary policy,
– Investment Tax Credit or other tax incentives
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 Why the AD Curve Might Shift
• Changes in G
– Government spending, e.g., defense
– State & local spending, e.g., roads, schools

• Changes in NX
– Booms/recessions in countries that buy our
exports
– Appreciation/depreciation resulting from
international speculation in foreign exchange
market

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 Active Learning 1 The Aggregate-Demand curve

What happens to the AD curve in each of the

following scenarios?
A. A ten-year-old investment tax credit
expires.
B. The U.S. exchange rate falls.
C. A fall in prices increases the real value of
consumers’ wealth.
D. State governments replace their sales
taxes with new taxes on interest, dividends,
and capital gains.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 18
management system for classroom use.
 Look for the answers to these questions:
• Why does the Aggregate-Demand curve slope
downward? What shifts the AD curve?
• What is the slope of the Aggregate-Supply curve in
the short run? In the long run?
What shifts the AS curve(s)?
• How does the model of aggregate demand and
aggregate supply explain economic fluctuations?

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 19
management system for classroom use.
The Aggregate-Supply (AS ) Curves (Đường tổng cung)

The AS curve shows P LRAS

the total quantity of
goods and services SRAS
firms produce and
sell at any given
price level/ Cho biết
lượng hàng hoá dịch
vụ nền kinh tế sản
xuất tại mỗi mức giá
cho trước Y

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The Aggregate-Supply (AS ) Curves (Đường tổng cung)

The AS curve shows the

P LRAS
total quantity of
goods and services firms
SRAS
produce and sell at any
given price level.

AS is:
§ upward-sloping in
short run/ đường dốc
lên trong ngắn hạn
§ vertical in long run/ Y
thẳng đứng trong dài
hạn
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 The Long-Run Aggregate-Supply Curve (LRAS)

The natural rate of output

(YN) is the amount of output P LRAS
the economy produces when
unemployment is at its natural
rate/ Tỷ lệ sản lượng tự nhiên
(YN) là sản lượng mà nền kinh
tế tạo ra khi tỷ lệ thất nghiệp ở
mức tự nhiên.
Also called: potential output
(sản lượng tiềm năng) or
full-employment output (sản Y
lượng toàn dụng) YN

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 Why LRAS Is Vertical
YN determined by the
economy’s stocks of labor,
capital, and natural P LRAS
resources, and on the level of
technology/ được xác định bởi
trữ lượng lao động, vốn và tài
nguyên thiên nhiên của nền P2
kinh tế, và về trình độ công
nghệ P1
An increase in P does not
affect any of these, so it does
not affect YN/ P tăng không Y
ảnh hưởng các yếu tố này, do YN
vậy không ảnh hưởng YN
(Classical dichotomy)
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 Why the LRAS Curve Might Shift
Any event that changes
any of the determinants P LRAS1 LRAS2
of YN will shift LRAS/
Bất kỳ sự kiện nào thay
đổi bất kỳ yếu tố nào
quyết định YN đều sẽ
thay đổi LRAS
Example: Immigration
increases L, causing YN
to rise/ nhập cư gia tăng
L, làm YN tăng Y
YN Y’
N

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 Why the LRAS Curve Might Shift
• Changes in L or natural rate of unemployment/ Thay
đổi của L hoặc tỷ lệ thất nghiệp tự nhiên
– Immigration/ Nhập cư
– Baby-boomers retire/ Những người được sinh trong thời kỳ
bùng nổ trẻ sở sinh nghỉ hưu
– Government policies reduce natural u-rate/ Chính sách
giảm tỷ lệ thất nghiệp tự nhiên
• Changes in K or H/ Thay đổi của K hoặc H
– Investment in factories, equipment/ Đầu tư vào nhà xưởng,
thiết bị
– More people get college degrees/ Nhiều người lấy được
bằng đại học hơn
– Factories destroyed by a hurricane/ Nhà xưởng bị tiêu huỷ
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 Why the LRAS Curve Might Shift
• Changes in natural resources/ Thay đổi của
tài nguyên thiên nhiên
– Discovery of new mineral deposits
– Reduction in supply of imported oil
– Changing weather patterns that affect
agricultural production

• Changes in technology/ Thay đổi của công

nghệ
– Productivity improvements from technological
progress
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 Using AD & AS to Depict Long-Run Growth & Inflation
Over the long run, tech.
progress shifts LRAS to
LRAS2010
the right and growth in P LRAS2000
the money supply shifts LRAS1990
AD to the right/ Trong
dài hạn, tiến bộ công
nghệ dịch chuyển LRAS P2010
sang phải và tăng
P2000
trưởng cung tiền dịch
chuyển AD sang phải P1990 AD2010
Result: ongoing inflation
and growth in output/ AD2000
lạm phát và tăng trưởng AD1990
Y
sản lượng tang. Y1990 Y2000 Y2010

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 Short Run Aggregate Supply (SRAS)

The SRAS curve is

upward sloping/ SRAS P
là đường dốc lên
SRAS
Over the period of 1–2
years, an increase in P P2
causes an increase in
the quantity of goods
P1
and services supplied/
Cứ 1-2 năm, P tăng làm
tăng cung số lượng
hang hoá và dịch vụ Y
Y1 Y2

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 Why the Slope of SRAS Matters
If AS is vertical,
fluctuations in AD do not LRAS
cause fluctuations in P
output or employment/ Phi
Nếu AS thẳng đứng, AD SRAS
biến động không gây Phi
ảnh hưởng đến sản
lượng hoặc việc làm.

If AS slopes up, ADhi

Plo
then shifts in AD
do affect output and AD1
Plo
employment/ Nếu AS ADlo
dốc lên, AD dịch chuyển Y
Ylo Y1 Yhi
làm ảnh hưởng đến sản
lượng và việc làm.
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 Three Theories of SRAS
• Theories that explain why the AS curve slopes
upward in short-run:
– Sticky-wage theory (Lý thuyết tiền lương kết
dính/ cứng nhắc)
– Sticky-price theory (Lý thuyết giá cả kết dính/
cứng nhắc)
– Misperceptions theory (Lý thuyết về sự ngộ
nhận)
• In each, some type of market imperfection:
Output deviates from its natural rate when the actual
price level deviates from the price level people
expected.
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 1. The Sticky-Wage Theory
• Nominal wages are sticky in the short run, they
adjust sluggishly/ Lương danh nghĩa cứng nhắc
trong ngắn hạn, điều chỉnh rất chậm chạp
– Due to labor contracts, social norms
– Firms and workers set the nominal wage in advance
based on PE, the price level they expect to prevail.
• If P > PE,
– Revenue is higher, but labor cost is not.
– Production is more profitable, so firms increase output
and employment.
Hence, higher P causes higher Y, so the SRAS curve slopes
upward/ P cao hơn làmY cao hơn, SRAS dốc lên
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 2. The Sticky-Price Theory
• Many prices are sticky in the short run/
Nhiều giá cả cứng nhắc trong ngắn hạn
– Due to menu costs, the costs of adjusting prices.
Examples: cost of printing new menus, the time
required to change price tags …
– Firms set sticky prices in advance based on PE

Do chi phí thực đơn, chi phí điều chỉnh giá, các
công ty xác định giá cứng nhắc trước dựa trên PE

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 2. The Sticky-Price Theory
• Suppose CB increases the money supply unexpectedly/ Giả
sử NHTW tăng cung tiền bất ngờ
– In the long run, P will rise/ Trong dài hạn, P sẽ tăng.
– In the short run:
• Firms without menu costs can raise their prices immediately/
Công ty không có chi phí thực đơn có thể tăng giá ngay lập
tức.
• Firms with menu costs wait to raise prices. With relatively
low prices: increase demand for their products: increase
output and employment/ Công ty có chi phí thực đơn chờ
đợi để tắng giá. Với giá tương đối thấp: tang cầu sản phẩm
công ty, tăng sản lượng và việc làm
Hence, higher P is associated with higher Y, so the SRAS curve
slopes upward.
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 3. The Misperceptions Theory
• Imperfection/ Không hoàn hảo
– Firms may confuse changes in P with changes in the relative
price of the products they sell/ Các công ty có thể từ chối
thay đổi P với sự thay đổi của giá sản phẩm họ bán
• If P rises above PE/ Nếu P tăng cao hơn PE
– A firm sees its price rise before realizing all prices are rising.
The firm may believe its relative price is rising, and may
increase output and employment/ Một công ty thấy giá của
nó tăng trước khi nhận ra tất cả giá đang tăng. Công ty có
thể tin rằng giá tương đối của nó đang tăng, và có thể tăng
sản lượng và việc làm.
So, an increase in P can cause an increase in Y, making the
SRAS curve upward-sloping.
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 Why the SRAS Curve Might Shift

Everything that shifts

LRAS shifts SRAS,
too. P LRAS
SRAS
Also, PE shifts SRAS: SRAS
If PE rises, workers & PE
firms set higher
wages. PE
At each P,
production is less
profitable, Y falls, Y
SRAS shifts left. YN
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 The Long-Run Equilibrium

In the long-run P LRAS

equilibrium,
SRAS
PE = P,
Y = YN ,
PE
and unemployment
is at its natural rate.
AD
Y
YN

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 36
management system for classroom use.
 Look for the answers to these questions:
• What are economic fluctuations? What are their
characteristics?
• Why does the Aggregate-Demand curve slope
downward? What shifts the AD curve?
• What is the slope of the Aggregate-Supply curve in
the short run? In the long run?
What shifts the AS curve(s)?
• How does the model of aggregate demand and
aggregate supply explain economic fluctuations?

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 37
management system for classroom use.
 Analyzing Economic Fluctuations
• Four steps to analyzing economic fluctuations:
1. Determine whether the event shifts AD or AS./ Xác
định sự kiện dịch chuyển AD hay AS
2. Determine whether curve shifts left or right./ Xác định
xem đường (từ bước 1) dịch chuyển sang trái hay sang
phải.
3. Use AD–AS diagram to see how the shift changes Y
and P in the short run./ Sử dụng sơ đồ AD-AS để thấy
được thay đổi của Y và P trong ngắn hạn.
4. Use AD–AS diagram to see how economy moves from
new SR equilibrium to new LR equilibrium./ Sử dụng sơ
đồ AD-AS để thấy được nền kinh tế dịch chuyển điểm
cân bằng ngắn hạn mới sang cân bằng dài hạn mới
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 The Effects of a Shift in AD
Event: Stock market crash
1. Affects C, AD curve
P LRAS
2. C falls, so AD shifts left
3. SR equilibrium at B. SRAS1
P and Y lower,
unemployment higher P1 A SRAS2
4. Over time, PE falls,
P2 B
SRAS shifts right,
until LR equilibrium at C. Y P AD1
3 C
and unemployment back
AD2
at initial levels.
Y
Y2 YN

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 Two Big AD Shifts: 1.The Great Depression
• From 1929–1933,
money supply fell 28% U.S. Real GDP,
due to problems in billions of 2000 dollars
900
banking system 850

• stock prices fell 90%, 800

750
reducing C and I 700
• Y fell 27% 650
600
• P fell 22%
550
• Unemployment rate 1929
1930
1931
1932
1933
1934
rose from 3% to 25%
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 Two Big AD Shifts: 2.The World War II Boom
• From 1939–1944, U.S. Real GDP,
billions of 2000 dollars
• government outlays 2,000
rose from $9.1 billion 1,800
to $91.3 billion 1,600

• Y rose 90% 1,400

1,200
• P rose 20%
1,000
• unemployment fell
800
from 17% to 1%
1939
1940
1941
1942
1943
1944
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 Active Learning 2 Working with the model
Draw the AD-SRAS-LRAS diagram for the
U.S. economy starting in a long-run
equilibrium.
• A boom occurs in Canada. Use your
diagram to determine the SR and LR effects
on U.S. GDP, the price level, and
unemployment.

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 The Great Recession of 2008–2009
• Large contractionary shift in AD
– Real GDP fell sharply
• By 4.2% between the forth quarter of 2007 and the
second quarter of 2009
– Employment fell sharply
• Unemployment rate rose from 4.4% in May 2007 to
10.0% in October 2009
• The housing market played a central role in
this recession…

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 CASE STUDY: The Great Recession of 2008–2009
220 Case-Shiller Home Price Index

200

180
2000 = 100

160

140

120

100

80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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 The Great Recession of 2008–2009
• Rising house prices during 2002–2006 due
to:
– Low interest rates
– Easier credit for “sub-prime” borrowers
– Government policies to increase
homeownership
– Securitization of mortgages

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 The Great Recession of 2008–2009
• Securitization of mortgages:
– Investment banks purchased mortgages from
lenders,
• Created securities backed by these mortgages,
• Sold the securities to banks, insurance companies,
and other investors.
– Mortgage-backed securities perceived as safe,
since house prices “never fall”

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management system for classroom use.
 The Great Recession of 2008–2009
• Consequences of 2006–2009 housing
market crash:
– Millions of homeowners “underwater”—owed
more than house was worth.
– Millions of mortgage defaults and foreclosures.
– Banks selling foreclosed houses increased
surplus and downward price pressures.
– Housing crash badly damaged construction
industry: 2010 unemployment rate was 20.6%
in construction vs. 9.6% overall.

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 The Great Recession of 2008–2009
• Consequences of 2006–2009 housing
market crash:
– Mortgage-backed securities became “toxic,”
• Heavy losses for institutions that purchased them,
• Widespread failures of banks and other financial
institutions.
– Sharply rising unemployment and falling GDP.

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 The Great Recession of 2008–2009
• The policy response:
– Federal Reserve reduced Fed Funds rate
target to near zero.
– Federal Reserve purchased mortgage-backed
securities and other private loans.
– U.S. Treasury injected capital into the banking
system to increase banks’ liquidity and
solvency in hopes of staving off a “credit
crunch.”
– Fiscal policymakers increased government
spending and reduced taxes by $800 billion.

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 The Effects of a Shift in SRAS

Event: Oil prices rise

1. Increases costs, shifts P LRAS
SRAS (assume LRAS
SRAS2
constant)
2. SRAS shifts left SRAS1
B
3. SR equilibrium at point P2
B. P higher, Y lower, P1 A
unemployment higher
From A to B, AD1
stagflation, a period Y
Y2 YN
of falling output and
rising prices.
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 Accommodating an Adverse Shift in SRAS
If policymakers do nothing,
4. Low employment
P LRAS
causes wages to fall,
SRAS shifts right, until SRAS2
LR equilibrium at A. P3 C SRAS1
B
P2
Or, policymakers could use
fiscal or monetary policy to P1 A
AD2
increase AD and
accommodate the AS shift: AD1
Y back to YN, but Y
Y2 YN
P permanently higher.
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The 1970s Oil Shocks and Their Effects

1973–75 1978–80

Real oil prices + 138% + 99%

CPI + 21% + 26%

Real GDP – 0.7% + 2.9%

# of unemployed + 3.5 + 1.4

persons million million
 John Maynard Keynes, 1883–1946
The General Theory of Employment, Interest, and
Money, 1936
• Argued recessions and depressions
can result from inadequate demand;
policymakers should shift AD.
• Famous critique of classical theory:
The long run is a misleading guide to
current affairs. In the long run, we are all dead.
Economists set themselves too easy, too useless a task if
in tempestuous seasons they can only tell us when the
storm is long past, the ocean will be flat.
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 Conclusion
• This chapter has introduced the model of
aggregate demand and aggregate supply
– Helps explain economic fluctuations.
• Keep in mind:
– These fluctuations are deviations from the long-run
trends explained by the models we learned in previous
chapters.
• In the next chapter
– How policymakers can affect aggregate demand with
fiscal and monetary policy.

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 Summary
• Short-run economic fluctuations around long-run trends
• Are irregular and largely unpredictable.
• When recessions occur, real GDP and other measures of
income, spending, and production fall, while
unemployment rises.
• Classical economic theory assumption: nominal variables
such as the money supply and the price level do not
influence real variables such as output and employment.
• Accurate in the long run but not in the short run

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 Summary
• Model of aggregate demand and aggregate supply
• The output of goods and services and the overall level of
prices adjust to balance aggregate demand and
aggregate supply.
• The aggregate-demand curve slopes downward:
• The wealth effect
• The interest-rate effect
• The exchange-rate effect
• Any event or policy that raises consumption, investment,
government purchases, or net exports at a given price level
increases aggregate demand.

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 Summary
• Any event or policy that reduces consumption, investment,
government purchases, or net exports at a given price level
decreases aggregate demand.
• The long-run aggregate-supply curve is vertical.
• The quantity of goods and services supplied depends on
the economy’s labor, capital, natural resources, and
technology but not on the overall level of prices.
• Three theories explain the upward slope of the short-run
aggregate-supply curve.

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 Summary
• Sticky-wage theory
• Sticky-price theory
• Misperceptions theory
• All three theories imply that output deviates from its natural
level when the actual price level deviates from the price
level that people expected.
• Shifts of short-run aggregate supply curve
• Events that alter the economy’s ability to produce output
• Causes of economic fluctuations
• Shift in aggregate demand and aggregate supply

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