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(Week 78) McConnell - 22e - PPT - Ch32 - Final
(Week 78) McConnell - 22e - PPT - Ch32 - Final
32-2
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Aggregate Demand
Real GDP desired at each price level
Inverse relationship:
• Real balances effect
• Interest rate effect
• Foreign purchases effect
32-3
LO32.1
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The Aggregate Demand Curve
AD
0
Real domestic output, GDP
32-4
LO32.1
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Changes in Aggregate Demand
Determinants of aggregate demand: Shift factors
affecting C, I, G, Xn.
Two components involved:
1. Change in one of the determinants
2. Multiplier effect.
32-5
LO32.2
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Changes in Aggregate Demand Graphed
Increase in
aggregate
demand
Price level
AD2
Decrease in
aggregate AD1
demand AD3
0
Real domestic output, GDP
32-6
LO32.2
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Consumer Spending
Consumer wealth
Household borrowing
Consumer expectations
Personal taxes
32-7
LO32.2
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Investment Spending
Real interest rates
Expected returns:
• Expectations about future business conditions
• Technology
• Changes in excess capacity
• Business taxes
32-8
LO32.2
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Government Spending
Government spending increases:
• Aggregate demand increases (as long as interest
rates and tax rates do not change)
• More transportation projects
Government spending decreases:
• Aggregate demand decreases
• Less military spending 32-9
LO32.2
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Net Export Spending
National income abroad
Exchange rates:
• Dollar depreciation
• Dollar appreciation
32-10
LO32.2
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Aggregate Supply
Total real output produced at each price level.
Relationship depends on time horizon:
• Immediate short run
• Short run
• Long run
32-11
LO32.3
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Aggregate Supply in the Immediate Short Run
Immediate-short-run
aggregate supply
Price level
P1 ASISR
0 Qf
Real domestic output, GDP
32-12
LO32.3
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The Aggregate Supply Curve (Short Run)
AS
Aggregate supply
(short run)
Price level
0 Qf
Real domestic output, GDP
32-13
LO32.3
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Aggregate Supply in the Long Run
ASLR
Price level
Long-run
aggregate
supply
0 Qf
Real domestic output, GDP
32-14
LO32.3
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Changes in Aggregate Supply
Determinants of aggregate supply: Shift factors
Collectively position the AS curve
Changes raise or lower per-unit production costs
32-15
LO32.4
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Changes in Aggregate Supply Graphed
AS3
AS1
AS2
Decrease in
aggregate supply
Price level
Increase in
aggregate supply
0
Real domestic output, GDP
32-16
LO32.4
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Input Prices
Domestic resource prices:
• Labor
• Capital
• Land
Prices of imported resources:
• Imported oil
• Exchange rates 32-17
LO32.4
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Productivity
Real output per unit of input
• Increases in productivity reduce costs
• Decreases in productivity increase costs
total output
Productivity = total inputs
32-19
LO32.4
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The Equilibrium Price Level and Equilibrium Real GDP
AS
Real Output Real Output
Price level (index numbers)
32-20
LO32.5
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An Increase in Aggregate Demand That Causes Demand-
Pull Inflation
AS
P2
Price level
P1
AD2
AD1
0 Qf Q 1 Q 2
Real domestic output, GDP
32-21
LO32.6
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A Recession Resulting from a Leftward Shift of Aggregate
Demand When the Price Level Is Downwardly Inflexible
AS
Price level
b
P1 a
P2 c
AD2 AD1
0 Q 1 Q2 Qf
Real domestic output, GDP
32-22
LO32.6
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Decreases in AD: Recession and Cyclical
Unemployment
Prices are downwardly inflexible:
• Fear of price wars
• Menu costs
• Wage contracts
• Efficiency wages
• Minimum wage law 32-23
LO32.6
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Global Perspective 32.1
32-24
LO32.6
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Source: Organisation for Economic Co-operation and Development (OECD).
A Decrease in Aggregate Supply That Causes Cost-
Push Inflation
AS2
AS1
Price level
P2 b
P1 a
AD
0 Q 1 Qf
Real domestic output, GDP
32-25
LO32.6
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Growth, Full-Employment, and Relative Price Stability
AS1
AS2
Price level P3 b
P2 c
P1 a
AD2
AD1
0 Q1 Q2 Q3
Real domestic output, GDP
32-26
LO32.6
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Last Word: Stimulus and the Great Recession (1 of 2)
Housing collapse triggers bank failures which leads to
recession.
Federal Reserve intervenes: Lowers short-term
interest rates.
Federal government begins largest peacetime
program of spending.
32-27
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Last Word: Stimulus and the Great Recession (2 of 2)
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