CHAPTER 14 (2014)

Apunte Inglés
Universidad Blanquerna (URL)
Grado Relaciones Internacionales - 1º curso
Asignatura Introduction to Economics
Año del apunte 2014
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Fecha de subida 30/11/2014
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ECONOMICS. CHATPER 14 AGGREGATE DEMAND AND AGGREGATE SUPPLY AGGREGATE DEMAND.
Aggregate demand curve — Relationship between the aggregate price level and the quantity of aggregate output demanded by households (C), businesses (I), the government (G) and the rest of the world (NX).
GDP = C + I + G + NX -Wealth effect of a change in the aggregate price level — Higher aggregate price level reduces the purchasing power of households’ wealth and reduces consumer spending.
-Interest rate effect of a change in the aggregate price level — Higher aggregate price level reduces the purchasing power of households’ money holdings, leading to a rise in interest rates and a fall in investment spending and consumer spending.
SHIFTS OF THE AGGREGATE DEMAND CURVE.
The aggregate demand curve shifts because of: -Changes in expectations -Wealth -Stock of physical capital -Government policies: Fiscal policy or monetary policy.
CHANGES IN EXPECTATIONS.
Consumers and firms are more optimistic —> Aggregate demand increases Consumers and firms are more pessimistic —> Aggregate demand decreases CHANGES IN WEALTH.
Real value of the household assets rises —> Aggregate demand increases Real value of the household assets falls —> Aggregate demand decreases SIZE OF THE EXISTING STOCK OF PHYSICAL CAPITAL.
If the existing SPC is relatively small —> Aggregate demand increases If the existing SPC is relatively large —> Aggregate demand decreases FISCAL POLICY.
If government increases spending or cuts taxes —> Aggregate demand increases If government reduces spending or raises taxes —> Aggregate demand decreases MONETARY POLICY.
Central bank increases the quantity of money —> Aggregate demand increases Central bank decreases the quantity of money —> Aggregate demand decreases ECONOMICS. CHATPER 14 AGGREGATE SUPPLY Aggregate supply curve — Relationship between the aggregate price level and the quantity of aggregate output in the economy.
SHORT-RUN AGGREGATE SUPPLY CURVE.
Is upward-sloping because nominal wages are sticky in the short-run.
*A higher aggregate price level leads to higher profits and increased aggregate profit in the short-run.
NOMINAL WAGE: Dollar amount of the wage paid.
STICKY WAGES: Nominal wages that are slow to fall even in the face of high unemployment and slow rise even in the face of labor shortages.
THE SHIFTS OF THE SHORT-RUN AGGREGATE SUPPLY CURVE provokes changes in: -Commodity prices -Nominal wages -Productivity This lead to changes in producers’ profits and shifts the short-run aggregate supply curve.
FACTORS THAT SHIFT SHORT-RUN AGGREGATE SUPPLY.
1-Changes in commodity prices Commodity prices fall —> Short-run aggregate supply increases Commodity prices rise —> Short-run aggregate supply decreases 2-Changes in nominal wages Nominal wages fall —> Short-run aggregate supply increases Nominal wages rise —> Short-run aggregate supply decreases 3-Changes in productivity If workers become more productive —> Short-run aggregate supply increases If workers become less productive —> Short-run aggregate supply decreases LONG-RUN AGGREGATE SUPPLY CURVE.
Shows the relationship between aggregate price level and quantity of aggregate output supplied that would exist if all prices were fully flexible.
POTENTIAL OUTPUT: Level of real GDP the economy would produce if all prices were fully flexible.
THE AS-AD MODEL.
It uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations.
ECONOMICS. CHATPER 14 The economy is in short-run macroeconomic equilibrium when the quantity of aggregate output supplied = quantity demanded.
Short-run equilibrium aggregate price level: Aggregate price level in the short-run macroeconomic equilibrium.
Short-run equilibrium aggregate output: Quantity of aggregate output produced in the short-run macroeconomic equilibrium.
SHOCKS.
DEMAND SHOCK: Event that shifts the Aggregate Demand curve.
SUPPLY SHOCK: Event that shifts the Aggregate Supply curve.
STAGFLATION: Inflation + Aggregate output.
GAP RECAP.
-Recessionary gap when aggregate output is below potential output.
-Inflation gap when aggregate output is above potential output.
-Output gap is the % difference between —> Actual aggregate output and potential output.
*NEGATIVE SUPPLY SHOCKS pose a policy dilemma: policy that stabilizes aggregate products by increasing aggregate demand will lead to inflation, but a policy that stabilizes prices by reducing aggregate demand will deepen the output slump.
MACROECONOMIC POLICY.
-Economy is self-correcting in the long-run.
-Stabilization policy is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions.
-POLICY IN THE FACE OF SUPPLY SHOCKS: There are no easy policies to shift the short-run aggregate supply curve.
-POLICY DILEMMA: Policy that counteracts the fall in aggregate output by increasing aggregate demand curve will lead to higher inflation, but a policy that counteracts inflation by reducing aggregate demand will deepen the output slump.
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