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Principles of Macroeconomics ECON 202

COQUITLAM COLLEGE

Kojo Laryea

AGGREGATE DEMAND AND AGGREGATE SUPPLY Chapter 14

14-2Copyright © 2017 by Nelson Education Ltd.

需求 总合

-.- ⼀

供 !合⼀总合 。

Objectives

Learn three key facts about short-run economic fluctuations

Consider how the economy in the short run differs from the economy in the long run

Use the model of aggregate demand and aggregate supply to explain economic fluctuations

See how shifts in aggregate demand or aggregate supply can cause booms and recessions

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AGGREGATE DEMAND AND AGGREGATE SUPPLY

Economic activity fluctuates from year to year. Recession: a period of falling incomes and rising unemployment.

Depression: a severe recession.

The variables that we study in this chapter are largely those we have already seen in previous chapters.

GDP – Unemployment – Interest rates – Exchange rates – Prices

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经济 衰退

收⼊ 下降 ,

失业上升

经济 消 条 收⼊下降巨 了忍

,

失业⼈⼝ 上升 巨 、烈

这 ⼀章 ⽤到的概念都是以前 学过的 。

The model of aggregate demand and aggregate supply is often used by economists to analyze short-run fluctuations in the economy.

AGGREGATE DEMAND AND AGGREGATE SUPPLY

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删的 modd

短期经济 市场的 波动 ,

THREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS

FACT 1: Economic fluctuations are irregular and unpredictable.

Business cycles They correspond to changes un business conditions

FACT 2: Most macroeconomic quantities fluctuate together.

Real GDP is the variable that is most commonly used to monitor short-run changes in the economy because it is a comprehensive measure of economic activity

FACT 3: As output falls, unemployment rises.

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经济的波动 最 不 平常的 和 ⽆法预测 的 ,

on_no 经济的上下波动

,

会时好时坏 ,

私们 可以通过 ⽐以 GDP的 变化来 观测 国家经济的变化 。

当 ㄚ d =7 ⽐ 1 1 亾

Y = reul GDP u .

FIGURE 14.1(a) A Look at Short-Run Economic Fluctuations

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FIGURE 14.1(b) A Look at Short-Run Economic Fluctuations

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FIGURE 14.1(c) A Look at Short-Run Economic Fluctuations

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QuickQuiz

List and discuss three key facts about economic fluctuations.

Quick Quiz

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EXPLAINING SHORT-RUN ECONOMIC FLUCTUATIONS

Describing the patterns that economies experience as they fluctuate over time is easy.

Explaining what causes these fluctuations is more difficult.

The theory of economic fluctuations remains controversial.

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The classical view is sometimes described by saying, Money is a veil.

What is important, however, are the real variables and the economic forces that determine them.

Real variables: Real GDP, Unemployment, output growth, real wage

Nominal variables: Nominal GDP, price, money supply, nominal

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THE ASSUMPTIONS OF CLASSICAL ECONOMIES

EXPLAINING SHORT-RUN ECONOMIC FLUCTUATIONS

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Most economists believe that classical theory describes the world in the long run but not in the short run.

To understand how the economy works in the short run, we need a new model.

The new model focuses on how real and nominal variables interact.

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THE REALITY OF SHORT-RUN FLUCTUATIONS

EXPLAINING SHORT-RUN ECONOMIC FLUCTUATIONS

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Model of aggregate demand and aggregate supply: The model most economists use to explain short-run fluctuations in economic activity around its long-run trend. Aggregate-demand curve: A curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level. Aggregate-supply curve: A curve that shows the quantity of goods and services that firms choose to produce and sell at each price level.

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THE MODEL OF AGGREGATE DEMAND AND AGGREGATE SUPPLY

EXPLAINING SHORT-RUN ECONOMIC FLUCTUATIONS

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ADIASmode.li 观测 在短期时经济的波动与变 , 跟⻓期 时 的 变化 态

AD : 代表 了 整个国家 能有的 花费 与 产量 (国家的购买情况? 需求 总合

供给 总和。 SRAS ', 代表了 整个国家的 了啊 ,

FIGURE 14.2 Aggregate Demand and Aggregate Supply

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P =

SRASAD = Y = Y

= real GDP

THE AGGREGATE-DEMAND CURVE

The aggregate-demand curve tells us the quantity of all goods and services demanded in the economy at any given price level.

androm ina/Shutterstock

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在 ⼀定 价格 的 时候全国对物品 的

需求 。 ⼆ 丫 是啊 ,

THE AGGREGATE-DEMAND CURVE

This means that, other things being equal, a fall in the economy s overall level of prices (from say P1 to P2) tends to raise the quantity of goods and services demanded (from Y1 to Y2).

Conversely, an increase in the price level reduces the quantity of goods and services demanded

androm ina/Shutterstock

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PHYTPTT

Each of these four components contributes to the aggregate demand for goods and services For now, we assume that government spending is fixed by policy The three other components of spending- consumption, investment and net export- depend on economic conditions and in particular, on the price level

14-19

WHY THE AGGREGATE-DEMAND CURVE SLOPES DOWNWARD

THE AGGREGATE-DEMAND CURVE

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当 C.I.GNX-x.mg 中 任意 ⼀个改变

ADshift.quutgdoue.pt= = X-M

The price level and consumption: The Wealth Effect A decrease in the price level makes consumers wealthier, which in turn encourages them to spend more The increase in consumer spending means a larger quantity of goods and services are demanded Conversely, an increase in the price level reduces the real value of money, in turn reducing wealth, consumer spending and the quantity of goods and services demanded

14-20

WHY THE AGGREGATE-DEMAND CURVE SLOPES DOWNWARD

THE AGGREGATE-DEMAND CURVE

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物价 下降相对 来经⼈们 更有钱了 , 所以 会买更多的东⻄ shmae

代表 T T

物价 上升 仍 相对来说更穷 了 ,

买更少的东⻄.gl/ess,=77l.

The price level and investment: The Interest Rate Effect A lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increases the quantity of goods and services demanded Conversely, a higher price level raises the interest rate, discourages investment spending, and decreases the quantity of goods and services demanded

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WHY THE AGGREGATE-DEMAND CURVE SLOPES DOWNWARD

THE AGGREGATE-DEMAND CURVE

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物价 低 会让 利率低 ,

因为 ⾼利率会让 财富 曾⻓过快 ,

因为 利率 低 所以 ,⼈们 更 愿 去 spend , ⽩似 ⽵

物价 ⾼ , 利率 ⾼ , ⼈们 更 想 存钱 , ⼆7 记 ,

Changes in consumption

Changes in investment

Changes in government purchases

Changes in net exports

14-23

WHY THE AGGREGATE-DEMAND CURVE MIGHT SHIFT

THE AGGREGATE-DEMAND CURVE

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⻅ ⼤纲 ⽐较 详细 ,

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THE AGGREGATE-DEMAND CURVE

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THE AGGREGATE-DEMAND CURVE

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THE AGGREGATE-DEMAND CURVE

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QuickQuiz

Explain the three reasons why the aggregate- demand curve slopes downward.

Give an example of an event that would shift the aggregate-demand curve.

Which way would this event shift the curve?

Quick Quiz

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What happens to the aggregate-demand curve in each of the following scenarios?

A. A ten-year-old investment tax credit expires.

B. The Canadian exchange rate falls.

C. A fall in prices increases the real value of consumers’ wealth.

D. Provincial governments replace their sales taxes with new taxes on interest, dividends, and capital gains.

Active Learning Aggregate-Demand Curve

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A. A ten-year-old investment tax credit expires. I falls, AD curve shifts left.

B. The Canadian exchange rate falls. NX rises, AD curve shifts right.

C. A fall in prices increases the real value of consumers’ wealth. Move down along AD curve (wealth-effect).

D. Provincial governments replace sales taxes with new taxes on interest, dividends, and capital gains. C rises, AD shifts right.

Active Learning Answers

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THE AGGREGATE-SUPPLY CURVE

The aggregate-supply curve tells us the total quantity of goods and services that firms produce and sell at any given price level. Unlike the aggregate demand curve that is always upward sloping, the aggregate supply is curve shows a relationship that depends crucially on the time horizon being examined In the long run, the aggregate-supply curve is vertical, whereas in the short run, the aggregate supply is upward sloping

14-30Copyright © 2017 by Nelson Education Ltd.

SRAS 斜向 上 的线

LRAS 垂直的线

THE AGGREGATE-SUPPLY CURVE

To understand short-run economic fluctuations, and how the short-run behavior of the economy deviates from its long-run behavior, we need to examine both the long run aggregate-supply curve and the short-run aggregate-supply curve

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In the long run, an economy s production of goods and services (i.e., its real GDP) depends on its supplies of labour, capital, and natural resources and on the available technology used to turn these factors of production into goods and services.

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WHY THE AGGREGATE-SUPPLY CURVE IS VERTICAL IN THE LONG RUN

THE AGGREGATE-SUPPLY CURVE

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Because prices level does not affect the long-run determinants of real GDP, the long-run aggregate supply curve is vertical This is because in the long run, the economy is at full employment or its potential output level In other words, in the long run, the economy s labour, capital, natural resources, and technology determine the total quantity of goods and services supplied, and this quantity supplied is the same regardless of what the price level happens to be

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WHY THE AGGREGATE-SUPPLY CURVE IS VERTICAL IN THE LONG RUN

THE AGGREGATE-SUPPLY CURVE

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FIGURE 14.5 The Long-Run Aggregate-Supply Curve

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YEPotenti.lu realGDPLRAS 在最好的情况下

这个 国家 可 ⽣产 的 。 最⼤产量

-Y 怛定 = Y

Natural rate of output: the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate.

Potential output Full-employment output

14-35

WHY THE LONG-RUN AGGREGATE-SUPPLY CURVE MIGHT SHIFT

THE AGGREGATE-SUPPLY CURVE

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i

on_no

LRAS 交 于 ㄨ 轴 ( r.nl 𡶐 ) 那⼀点 ,

Changes in labour

Changes in capital

Changes in natural resources

Changes in technological knowledge

14-36

WHY THE LONG-RUN AGGREGATE-SUPPLY CURVE MIGHT SHIFT

THE AGGREGATE-SUPPLY CURVE

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With the introduction of the aggregate-demand curve and the long-run aggregate-supply curve we are now in a position to describe the economy s long-run trends.

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USING AGGREGATE DEMAND AND AGGREGATE SUPPLY TO DEPICT LONG-RUN GROWTH AND INFLATION

THE AGGREGATE-SUPPLY CURVE

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FIGURE 14.6 Long-Run Growth and Inflation in the Model of Aggregate Demand and Aggregate Supply

14-38Copyright © 2017 by Nelson Education Ltd.

As the economy becomes better able to produce goods and services over time, primarily because of technological progress, the long run aggregate-supply curve shifts to the right At the same time, as the Bank of Canada increases the money supply, the aggregate-demand curve also shifts to the right In this figure, output grows from 𝑌 𝑌 and then 𝑌 , and the price level arises from 𝑃 to 𝑃 and then to 𝑃

14-39

USING AGGREGATE DEMAND AND AGGREGATE SUPPLY TO DEPICT LONG-RUN GROWTH AND INFLATION

THE AGGREGATE-SUPPLY CURVE

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LRAST 因为 时间越 久 Potentiulr.nl GDP越⼤, 因为 科技在进步 , 也 因为科技 的 进步 ⼈们 富有了

,

ADT 因为 可以 买

更吗的 东⻄? 会 𩣱 内

In the short run, the price level does affect the economy s output.

An increase in the overall level of prices tends to raise the quantity of goods and services supplied and vice versa.

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WHY THE AGGREGATE-SUPPLY CURVE SLOPES UPWARD IN THE SHORT RUN

THE AGGREGATE-SUPPLY CURVE

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nr_PotntialreulGDP.li 的改变会 改变 ㄚ 但是是点到点的移动 ,

Why do changes in the price level affect output in the short run?

Macroeconomists have proposed three theories for the upward slope of the short-run aggregate supply curve.

In each theory, a specific market imperfection causes the supply side of the economy to behave differently in the short run than it does in the long run

Although each of the following theories will differ in detail, they share a common theme: the quantity of output supplied deviates from its long run, or natural level , when the actual price level deviates from the price level that

people expect it to be

When the price level rises above the expected level, output rises above its natural level, and when the price level falls below the expected level, output falls below its natural level

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WHY THE AGGREGATE-SUPPLY CURVE SLOPES UPWARD IN THE SHORT RUN (CONTINUED)

THE AGGREGATE-SUPPLY CURVE

1. The Sticky-Wage Theory

According to this theory, the short-run aggregate-supply curve slopes upward because nominal wages are slow to adjust to changing economic conditions

In other words, wages are sticky in the short run

To some extent, the slow adjustment of nominal wages is attributed to long term contracts between workers and firms fix nominal wages, sometimes for three years or longer

In addition, this slow adjustment may be attributed to social norms and notions of fairness that influence wage setting and that change only slowly over time

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WHY THE AGGREGATE-SUPPLY CURVE SLOPES UPWARD IN THE SHORT RUN (CONTINUED)

THE AGGREGATE-SUPPLY CURVE

因为 ⼯资 上升 容易

下降难 ,

⼯资 的 改变 很慢

1. The Sticky-Wage Theory

For example: imagine that a year ago, a firm expected price level to be $100 and, based on this expectation, it signed a contract with its workers agreeing to pay them, say, $20 per hour

In fact P, later turns out to be only 95. Because prices have fallen below expectation, the firm gets 5% less than expected for each unit of its product that it sells

The cost of labour used to make the output, however, is stuck at $20 per hour

Production is now less profitable, so the firm hires fewer workers and reduce of output supplied

Over time, the labour contract will expire, and the firm can renegotiate with its workers for a lower wage, but in the meantime, employment and production will remain below their long-run levels

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WHY THE AGGREGATE-SUPPLY CURVE SLOPES UPWARD IN THE SHORT RUN (CONTINUED)

THE AGGREGATE-SUPPLY CURVE

1. The Sticky-Wage Theory In short, according to the sticky-wage theory, the short-run aggregate –supply curve is upward sloping because nominal wages are based on expected prices and do not respond immediately when actual price level turns out to be different from what was expected This stickiness of wages gives firms an incentive to produce less than the natural level of output when the price level turns out to be lower than expected and to produce more than when the price level turns out to be higher than expected

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WHY THE AGGREGATE-SUPPLY CURVE SLOPES UPWARD IN THE SHORT RUN (CONTINUED)

THE AGGREGATE-SUPPLY CURVE

The Sticky-Price Theory The sticky-price theory emphasizes that the price of some goods and services also adjust sluggishly in response to changing economic conditions

This slow adjustment of prices occurs in part because there are costs to adjusting prices, called menu cost

Suppose that each firm in the economy announces its prices in advance based on the economic conditions it expects to prevail over the coming year

Then, after prices are announced, the economy experiences an unexpected change in economic conditions which reduces the overall price level

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WHY THE AGGREGATE-SUPPLY CURVE SLOPES UPWARD IN THE SHORT RUN (CONTINUED)

THE AGGREGATE-SUPPLY CURVE

价格的 改变也 ⽐较慢

-

The Sticky-Price Theory

Although some firms reduce their prices immediately in response to an unexpected change in economic conditions, other firms may not be able to reduce prices immediately because they may incur other menu costs

Because these lagging firms have prices that are too high, their sales decline. This may cause the firms to reduce output and employment

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WHY THE AGGREGATE-SUPPLY CURVE SLOPES UPWARD IN THE SHORT RUN (CONTINUED)

THE AGGREGATE-SUPPLY CURVE

公司 来不急 没价格 , 物价⼜下降 , ⼈们 会 觉得 公司的价格过⾼ ,轾产量下降 。

SUMMARY All two theories suggest that output deviates from its natural rate when the price level deviates from the price level that people expected. Mathematically, this is expressed as:

Where a is the number that determines how much output responds to unexpected changes in the price level.

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THE AGGREGATE-SUPPLY CURVE

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SUMMARY

In the long run, wages and prices are flexible rather than sticky and people are not confused about relative prices.

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THE AGGREGATE-SUPPLY CURVE

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i = 是

We can think of the short-run aggregate-supply curve as similar to the long-run aggregate-supply curve but made upward sloping by the presence of sticky wages, sticky prices

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WHY THE SHORT-RUN AGGREGATE-SUPPLY CURVE MIGHT SHIFT

THE AGGREGATE-SUPPLY CURVE

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When thinking about what shifts the short-run aggregate supply curve, we have to consider all those variables that shift the long-run aggregate-supply curve plus a new variable the expected price level that influences the wages that are stuck, the prices that are stuck, and the perceptions about relative prices.

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WHY THE SHORT-RUN AGGREGATE-SUPPLY CURVE MIGHT SHIFT (CONTINUED)

THE AGGREGATE-SUPPLY CURVE

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THE AGGREGATE-SUPPLY CURVE

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THE AGGREGATE-SUPPLY CURVE

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THE AGGREGATE-SUPPLY CURVE

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QuickQuiz

Explain why the long-run aggregate-supply curve is vertical.

Explain three theories for why the short-run aggregate-supply curve is upward sloping.

Quick Quiz

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TWO CAUSES OF ECONOMIC FLUCTUATIONS

To keep things simple, we assume the economy begins in the long-run equilibrium, as shown in Figure 14.8.

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FIGURE 14.8 The Long-Run Equilibrium

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TWO CAUSES OF ECONOMIC FLUCTUATIONS

The long-run equilibrium of the economy is found where the aggregate-demand curve crosses the long-run aggregate-supply curve (point A). When the economy reaches this long-run equilibrium, wages, prices and perception will have adjusted so that the short-run aggregate-supply curve crosses this point as well

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Suppose a wave of pessimism overtakes the economy.

What is the macroeconomic impact of such a phenomenon?

14-59

THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND

TWO CAUSES OF ECONOMIC FLUCTUATIONS

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Four steps for analyzing this impact: 1. Does the event affect aggregate demand or

aggregate supply? 2. Determine the direction of the shift. 3. Use the diagram of aggregate demand and

aggregate supply to compare the initial and new equilibrium.

4. Keep track of the new short-run equilibrium, the new long-run equilibrium, and the transition between them.

14-60

THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

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FIGURE 14.9 A Contraction in Aggregate Demand

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First, because the wave of pessimism affects spending plans, it affects the aggregate-demand curve

Second, because households and firms now want to buy a smaller quantity of goods and services for any given price level, the event reduces aggregate demand

As Fig 14.9 shows, the aggregate-demand curve shifts to the left from AD1 to AD2

In the short run, the economy moves along the initial short-run aggregate-supply curve AS1, going from point A to point B

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THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

As the economy moves between these two points, output indicates that the economy is in a recession

Pessimism about the future leads to falling incomes and rising unemployment

In step four, there is a transition from the short-run equilibrium to the long-run equilibrium

Because of the reduction in aggregate demand, the price level initially falls from P1 to P2. The price level is thus below the level that people expect it to be before the fall in aggregate demand 14-63

THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

Although people are surprised in the short run, they will not remain surprised

Over time, expectations catch with reality, and the expected price level falls as well

The fall in the expected price level alters the wages, prices, and perceptions, which in turn influence the position of the short-run aggregate supply curve

In the new long-run equilibrium (point C), output is back to its natural level

The economy has corrected itself: A decline in output is reversed in the long run even without actions by policymakers

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THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

Thus in a long run, the shift in aggregate demand is reflected fully in the price level and not at all in the level of output

In other words, the long run effect of a shift in aggregate demand is a nominal change (the price level is lower) but not a real change (output is the same)

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THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

What should policymakers do when faced with a sudden fall in aggregate demand?

In this case, an increase in government spending or an increase in money supply would increase the quantity of goods and services demanded at any price and, therefore, would shift the aggregate- demand curve to the right

If policymakers can act with sufficient speed and precision, they can offset the initial shift in aggregate demand, return the aggregate demand back to AD1, and bring the economy back to point A

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THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

To sum up, there are three important lessons to remember here:

1. In the short run, shifts in aggregate demand cause fluctuations in the economy s output of goods and services.

2. In the long run, shifts in aggregate demand affect the overall price level but do not affect the level of output.

3. Policymakers who influence aggregate demand can potentially mitigate that severity of economic fluctuations.

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THE EFFECTS OF A SHIFT IN AGGREGATE DEMAND (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

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Suppose firms experience an increase in their costs of production.

What is the macroeconomic impact of such a phenomenon?

14-68

THE EFFECTS OF A SHIFT IN AGGREGATE SUPPLY

TWO CAUSES OF ECONOMIC FLUCTUATIONS

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The same four steps are used for analyzing this impact: Does the event affect aggregate demand or aggregate supply? Determine the direction of the shift. Use the diagram of aggregate demand and aggregate supply to compare the initial and new equilibrium. Keep track of the new short-run equilibrium, the new long-run equilibrium, and the transition between them. 14-69

TWO CAUSES OF ECONOMIC FLUCTUATIONS

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THE EFFECTS OF A SHIFT IN AGGREGATE SUPPLY (CONTINUED)

FIGURE 14.11 An Adverse Shift in Aggregate Supply

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FIGURE 14.12 Accommodating an Adverse Shift in Aggregate Supply

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Fig 14.11 shows that the short run aggregate-supply curve shifts to the left from AS1 to AS2

The output of the economy falls from Y1 to Y2, and the price level rises from P1 to P2.

Because the economy is experiencing both stagnation (falling prices) and inflation (rising prices), such an event is sometimes called stagflation

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THE EFFECTS OF A SHIFT IN AGGREGATE SUPPLY (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

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Now consider step four- the transition from the short-run equilibrium to long-run equilibrium

According to the sticky-wage theory, the key issue is how stagflation affects nominal wages

Firms and workers may at first respond to the higher level of prices by raising their expectations of the price level and setting higher nominal wages

In this case, firms costs will rise yet again, and the short-run curve will shift farther to the left making the problem of stagflation even worse 14-73

THE EFFECTS OF A SHIFT IN AGGREGATE SUPPLY (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

The low level of output and employment will put downward pressure on workers wages

As nominal wages fall, producing goods and services become more profitable, and the short run aggregate-supply curve shifts to the right

As it shifts back toward AS1, the price level falls, and the quantity of output approaches it natural level

In the long run, the economy returns to point A, where the aggregate-demand curve crosses the long-run aggregate-supply curve 14-74

THE EFFECTS OF A SHIFT IN AGGREGATE SUPPLY (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

This transition back to the initial equilibrium assumes that aggregate demand is held constant throughout the process

In the real world, that may not be the case

Policymaker who control monetary and fiscal policy might attempt to offset some of the effects of the shift in the short-run aggregate supply by shifting the aggregate-demand curve

This possibility is shown in Fig 14.12. in this case, changes in policy shift the aggregate-demand curve to the right from AD1 to AD2 exactly enough to prevent the shift in aggregate supply from affecting output 14-75

THE EFFECTS OF A SHIFT IN AGGREGATE SUPPLY (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

The economy moves directly from point A to point C

Output remains at its natural level, and the price level rises from P1 to P3

In this case, policymakers are said to accommodate the shift in aggregate supply

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THE EFFECTS OF A SHIFT IN AGGREGATE SUPPLY (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

To sum up, there are two important lessons to remember here:

Shifts in aggregate supply can cause stagflation a combination of recession (falling output) and inflation (rising prices). Policymakers who can influence aggregate demand can potentially mitigate the adverse impact on output but only at the cost of exacerbating the problem of inflation.

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THE EFFECTS OF A SHIFT IN AGGREGATE SUPPLY (CONTINUED)

TWO CAUSES OF ECONOMIC FLUCTUATIONS

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QuickQuiz

Suppose that the election of a popular prime minister suddenly increases people s confidence in the future.

Use the model of aggregate demand and aggregate supply to analyze the effect on the economy.

Quick Quiz

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THE END

Chapter 14

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