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Chapter objectives ,[object Object],[object Object],[object Object],[object Object]
Real GDP Growth in the United States Average growth rate = 3.5%
Time horizons ,[object Object],[object Object],The economy behaves much differently when prices are sticky.
In Classical Macroeconomic Theory, ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
When prices are sticky ,[object Object],[object Object],[object Object],[object Object],[object Object]
The model of  aggregate demand and supply ,[object Object],[object Object],[object Object]
Aggregate demand ,[object Object],[object Object],[object Object]
The Quantity Equation as Agg. Demand ,[object Object],[object Object],[object Object],[object Object],[object Object]
The downward-sloping  AD  curve ,[object Object],[object Object],Y   P AD
Shifting the  AD  curve ,[object Object],Y   P AD 1 AD 2
Aggregate Supply in the Long Run ,[object Object],is the  full-employment  or  natural  level of output, the level of output at which the economy’s resources are fully employed. “ Full employment” means that  unemployment equals its natural rate.
Aggregate Supply in the Long Run ,[object Object],[object Object],[object Object]
The long-run aggregate supply curve ,[object Object],Y   P LRAS
Long-run effects of an increase in  M ,[object Object],P 1 Y   P AD 1 AD 2 LRAS P 2 In the long run, this increases the price level… … but leaves output the same.
Aggregate Supply in the Short Run ,[object Object],[object Object],[object Object],[object Object]
The short run aggregate supply curve ,[object Object],[object Object],Y   P SRAS
Short-run effects of an increase in  M ,[object Object],Y 1 Y   P AD 1 AD 2 In the short run when prices are sticky,… … causes output to rise. SRAS Y 2
From the short run to the long run ,[object Object],rise fall remain constant In the short-run equilibrium, if then over time, the price level will This adjustment of prices is what moves the economy to its long-run equilibrium.
The SR & LR effects of   M  > 0 ,[object Object],A B C B = new short-run eq’m after Fed increases  M C = long-run equilibrium Y   P AD 1 AD 2 LRAS SRAS P 2 Y 2
How shocking!!! ,[object Object],[object Object],[object Object],[object Object]
The effects of a negative demand shock ,[object Object],A B C Over time, prices fall and the economy moves down its demand curve toward full-employment. LRAS AD 2 SRAS Y   P AD 1 P 2 Y 2
Supply shocks ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
CASE STUDY:  The 1970s oil shocks ,[object Object],[object Object],[object Object]
[object Object],CASE STUDY:  The 1970s oil shocks A B In absence of  further price shocks, prices will fall over time and economy moves back toward full employment. A SRAS 1 Y   P AD LRAS Y 2 SRAS 2
CASE STUDY:  The 1970s oil shocks ,[object Object],[object Object],[object Object],[object Object],[object Object]
CASE STUDY:  The 1970s oil shocks ,[object Object],[object Object]
CASE STUDY:  The 1980s oil shocks ,[object Object],[object Object]
Stabilization policy ,[object Object],[object Object]
Stabilizing output with  monetary policy B A The adverse supply shock moves the economy to  point B. SRAS 1 Y   P AD 1 SRAS 2 Y 2 LRAS
Stabilizing output with  monetary policy B A C But the Fed accommodates the shock by raising agg. demand. results:  P   is permanently higher, but  Y  remains at its full-employment level. Y   P AD 1 SRAS 2 Y 2 LRAS AD 2
Chapter summary ,[object Object],[object Object],[object Object]
Chapter summary ,[object Object],[object Object],[object Object]
Chapter summary ,[object Object],[object Object]
 

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MACROECONOMICS-CH9

  • 1.  
  • 2.
  • 3. Real GDP Growth in the United States Average growth rate = 3.5%
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  • 30. Stabilizing output with monetary policy B A The adverse supply shock moves the economy to point B. SRAS 1 Y P AD 1 SRAS 2 Y 2 LRAS
  • 31. Stabilizing output with monetary policy B A C But the Fed accommodates the shock by raising agg. demand. results: P is permanently higher, but Y remains at its full-employment level. Y P AD 1 SRAS 2 Y 2 LRAS AD 2
  • 32.
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  • 35.  

Editor's Notes

  1. This chapter has two main objectives. First, to motivate the study of business cycles, the subject of the five chapters in Part IV. Second, to introduce the model of aggregate supply and demand, thus providing students with an overall context for what follows. Having this context will allow students to better understand the role played by each of the more detailed pieces of the model (Keynesian Cross, IS-LM, theories of short-run aggregate supply, etc) as students learn them in the following chapters. This chapter is less difficult and a bit shorter than most other chapters in the text, and all of the concepts it introduces are all developed in more detail in the following chapters of Part IV. Therefore, you might consider spending a little less class time on this chapter than on other chapters in the book. This chapter derives the AD curve from the Quantity Theory of Money, a simple theory that students learned in an earlier chapter; hence, this provides a simple and quick way of deriving an AD curve from theory. As a theory of aggregate demand, though, the Quantity Theory is very incomplete - it omits fiscal policy, interest rates, and net exports, among other things. But, this chapter merely aims to introduce the AD curve and the AD/AS model, and makes clear that the following three chapters will develop the theory of aggregate demand in greater detail. Some professors, when teaching this chapter, merely present the downward-sloping AD curve rather than deriving it from the Quantity Theory. Although this is more ad hoc or “hand-waving” than deriving the AD curve from a theory, these professors offer the following arguments: First, they note that this saves time. Second, they believe that deriving the AD curve from the Quantity Theory requires students to learn things that they will have to “un-learn” in the following three chapters (such as the intuition for the AD curve’s negative slope). Third, most students are familiar with the AD curve already, having seen it in a principles of economics course, and therefore will accept it without seeing it derived from a theory. (Indeed, deriving the AD curve from the Quantity Theory may seem to them contrary to what they learned in their principles course). I think good arguments can be made for either position, and encourage you to do whatever you find most appropriate, effective, and comfortable for you and your students.