Ch.12

determinants of aggregate supply

-changes in input prices -changes in productivity -changes in legal-institutinal enviroment

short run

...when output prices are flexible, but input prices are totally fixed or highly inflexible....five year labor contracts, output prices are flexible, but input prices are fixed or nearly fixed, the upsweeping agh supply curve indicates a positive relationship between price and the amount of real input that the firm will offer. not constant. flatter at outputs below the full employment output level, and steps at output above it.

The Multiplier Effect:

an initial change in investment spending changes aggreate demand and GDP by more than the initial spending change. multiplier effect The multiplier measures how much larger the final change in GDP will be, it is the ratio of a change in GDP to the initial change in spending aka investment

AD AS Model

analyze change in real GDP and the price level simultaneously. insights on inflation, recession, unemployment, and economic growth...depicts fiscal and monetary policy

cost push inflation:

a leftward shift of aggregate supply, real output decline and a negative GDP gap occurs, a recession occurs, mid price of oil rocketed upwards

demand pull inflation

causes inflation, price level is being pulled up by the increase in aggregate demand, positive or inflationary GDP gap, actual GDP exceeds potential GDP

Multiplier

chain in real GDP/ initial change in spending.... or change in real GDP= multiplier x initial change in spending

determinants of aggregate demand

change in consumer spending change in investment spending change in government spending change in export spending

the aggregate demand curve ....

downward sloping because there is an inverse relationship between the price level and the amount of real output purchased

Downward Price Level Inflexibility:

fear of price wars menu costs wage contracts morale, effort, and productivity, AKA the ratchet Effect

immediate short run

lasts as long as both input price and output prices stay fixed, input prices are fixed because of contracts (wages an salary) output prices are fixed because often firms set fixed prices for their customers and then agree to supply whatever quantity demanded as a result of the fixed prices. ..ex: annual price for refrigerators horizontal line because the total amount of output supplied in the economy demands directly on the volume of spending that results at price lev. if total spending is low, firms will supply a small amount to match the low level of spending. if the total spending is high, they will supply a high level of output to match...oNLY AS LONG AS THE OUTPUT PRICES REMAIN FIXED

productivity

measure of real output per unit of input. Productivity = total output/ total input

equilibrium price level

price level at which agg demand curve and agg supply curve intersect

determinants of investment spending

r (expected return) > i (cost, which is the real interest rate) or up to where r=i

if agg demand and agg supply increase over time

real GDP will expand

Aggregate demand

schedule or curve that shows the total quality of goods and services demanded at different price levels

aggregate supply

schedule that shows the total unity of goods and serves supplied at different price levels. depends on the time horizon and how quickly output prices and input prices can change

why is consumption part of aggregate demand stable during times of crisis

the amount of consumption spending in the economy depends mainly on the flow of income, not the stock of wealth, the fed cut personal tax income to increase consumption spending, lower interest rates allowed homeowners to decrease monthly mortgage payment and increase consumption spending

equilibrium real output

the level of real GDP at which the aggregate demand curve and the aggregate supply curve intersect

per unit production costs

the reason why upslope of short-run agg supply curve isn't constant. reduced efficeny at both ends

lets break it down yo

Input prices: domestic resource prices: -decrease in wages reduce per unit production cost, agg supply curve shifts to the right -increase in wages shift curve to the left -labor supply increase because of immigration, wages and per unit proaction costs fall, shifts AS curve to right -labor supply decrease because increase in pensions cause early retirements, wage and per units costs rise, shifts AS curve to the left. imported resources: -added supplies of resource, reduce production cost. decrease in price of imported resources increase US agg supply while an increase in their price reduces agg supply. -a depreciation of the dollar will shift the AS curve to the left -dollar appreciates, US obtain more foreign currency with each dollar, increase imports, lower procuring cost, shift agg supply to right Change in productivity: increases in productivity shift AS curve to the right (technology equipment, education, better workforce) Legal Institutional Environment: -business taxes: higher business taxes, increase per unit cost, and reduce SR supply curve towards left..increase in taxes will increase production cost -government regulation: -the more regulation tends to increase production costs and shift agh supply to left

three time horizons

- immediate short run: both input prices as well as output prices are fixe. , curve is horizontal - short run: input prices are fixed, but output prices can vary. curve is bendy upwards - long run: input pries as well as output prices can vary, vertical curve

long run

both input prices and output prices are flexible, at economies full employment, will produce the full employment output level no matter what the price level is when both input and output prices are flexible, in the long run wages and the input prices rise and fall to match changes in the price level. so price level changes do not affect firms profit, and create no incentive for firms to alter their output every possible price level on the vertical axis is associate with the economy predicting at the full employment output level in the long run once input prices adjust to exactly match changes in output prices

break down of determinants

consumer spending: - consumer wealth -household borrowing -consumer expectations -personal taxes change in investment spending (capital goods) -interest rates (increases in real interest rates will raise borrowing cost, lower investment spending and reduce aggregate demand) - expected returns (higher expected returns, higher aggregate demand) - expected future business conditions (good returns, more investment, increased agg. demand) - technology (new tech. increased agg. demand) - degree of excess capacity (more excess capacity, decrease agg demand) - business taxes (more business tax, reduce profits, and decline agg. demand) change in government spending (increase in gov spending, increase agg. demand) change in net export spending (rise in exports relative to imports shifts agg demand, decrease in net exports shifts the agg demand curve left....) -national income abroad (rising national income abroad encourages foreigners to buy, so US exports rise, US agg. demand shifts to right. Decline in income abroad reduce exports and shift agg to left) -exchange rates (dollar depreciation increase net exports (imports go down, exports go up) and increases agg demand. dollar appreciation...net exports fall(imports fall, exports go up and therefore decreases aggregate demand)