Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

CHAPTER 5- AD AND AS

AS -- # of Y firms are willing to apply AD -- combination of price level and Y evel at which the goods market and money market are simultaneously equilibrium AD shifts if: Increase in money supply other expansionary policies: tax; spending; i , Thus, theres an increase money to spend, consumption increases AS shifts to the rights Any expansionary policy can be inflationary. Think of a vertical AS. If the AD shifts to the right, there is a new (and higher price).

1. AS
C1. Long-run Classical AS curve

Figure 2
Accumulating more inputs and technology; AS

full employment: If: D; Production

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Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

Then: focus on D sector, not on D sector If economy-wide: But if: all factors are used up, you cannot production. So, just price 100 w; D; no more w so just wages; Price of output At FE Potential GDP (target)

C2 Short-run Keynesian AS curve

supply any Y at existing P Due to u; they exploit u at current wage; So AS production do not change Price sticky => firms dont want P; when demand . But it only decrease or increase output. Notes: At CAS (LR) => GDP Potential depend on price level KAS (SR) => Price level dont depend on GDP level Definitions: - Frictional unemployment => usual searching for jobs. (labor mobility) - NRU => arising from natural labor market frictions

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Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

2. AD
Expansionary policies: shift AD (right) ( G; t; m)v.v.

AD depends on real money supply (M/P) Expansion Money market: If M/P ; Spending ; I; I ; AD v.v. If P; M/P ; AD ; v.v. Expansion goods market If consumer confidence ; => AD v.v. Tax cuts

By: Quantity Theory of Money explains this: GDP nominal = Pxy Velocity = V => (M) (V) = (P) (Y) Money supply = M If V is constant; then (M) (V) = P Y changes For M= PY; V= constant

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Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

3. Aggregate Demand Policies in Extreme Cases

a.) Keynesian Case C1. If AD , expected price is constant, then: Y* Y** v.v. (ex. G; tax cuts; m.) C2. If AS ; P, Y* Y C3. If AS ; P ; Y C4. If AD , Price is constant; Y

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Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

b.) Classical Case

C1. C2. C3. C4.

If AD ; P , Y is constant If AD ; P , Y is constant If AS ; P ; Y If AS ; P , Y

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Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

c.) If LR; AD ; AS : P; Y

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