Presentation Transcript
Slide1 : Aggregate Demand and Aggregate Supply, Monetary and Fiscal Policy 15,16
Introduction : Introduction Over the long run, real GDP grows about 3% per year on average.
In the short run, GDP fluctuates around its trend.
recessions: periods of falling real incomes and rising unemployment
depressions: severe recessions (very rare)
Three Facts About Economic Fluctuations : Three Facts About Economic Fluctuations The shaded bars are recessions U.S. real GDP, billions of 2000 dollars FACT 1: Economic fluctuations are irregular and unpredictable.
Three Facts About Economic Fluctuations : Three Facts About Economic Fluctuations FACT 2: Most macroeconomic quantities fluctuate together. Investment spending, billions of 2000 dollars
Three Facts About Economic Fluctuations : Three Facts About Economic Fluctuations FACT 3: As output falls, unemployment rises. Unemployment rate, percent of labor force
The Wealth Effect (P and C ) : The Wealth Effect (P and C ) Suppose P rises.
The dollars people hold buy fewer g&s, so real wealth is lower.
People feel poorer, so they spend less.
Thus, an increase in P causes a fall in C
…which means a smaller quantity of g&s demanded.
The Interest-Rate Effect (P and I ) : The Interest-Rate Effect (P and I ) Suppose P rises.
Buying g&s requires more dollars.
People save less than before.
Thus, an increase in P causes a decrease in I
…which means a smaller quantity of g&s demanded.
The Exchange-Rate Effect (P and NX ) : The Exchange-Rate Effect (P and NX ) An increase in P causes a decrease in NX
…which means a smaller quantity of g&s demanded. 7
The Slope of the AD Curve: Summary : The Slope of the AD Curve: Summary An increase in P reduces the quantity of g&s demanded because: AD P1 Y1 the wealth effect (C falls) the interest-rate effect (I falls) the exchange-rate effect (NX falls)
Catch the
buzz on authorSTREAM
Copyright © 2002-2008 authorSTREAM. All rights reserved.