Tải bản đầy đủ

Intermediate macroeconomics chapt09

Chapter 9:
Introduction to Economic
Fluctuations


Business Cycle
Changes in the level of economic activity. Real GDP
has grown at an average rate of 3% per year in 196095
But, growth has not been smooth:
– Recession: 1974-75, 1981-82, 1990-91

– Boom: 1964-69, 1983-84, 1993-95


Time Horizon in Macroeconomics
Long run: a time period in which prices are flexible
and can respond to changes in demand and supply.
Prices respond to policy changes.
Short-run: a time period in which prices are “sticky”
at some predetermined level. Prices do not respond
to policy changes.



Aggregate Demand
The relationship between the quantity of output
demanded and the price level
Money market equilibrium
– Money demand for transaction: (M/P) = kY

– Money supply = M/P
– Equilibrium: M/P = kY where k is a constant


Aggregate Demand Line
Price level

An increase in the price level (P) reduces the real
money balances (M/P), which lowers the quantity
demanded for goods and services.

AD

Output, Income


Shift in Aggregate Demand
An increase in the money supply (M) makes the real
money balances (M/P) to go up, which increases the
level of the AD (this is a shift to the right)
An decrease in the money supply (M) reduces lower
the real money balances (M/P), which decreases the
level of the AD (this is a shift to the left)


Shift in Aggregate Demand
Price level

Increase
AD2

Decrease


AD1
AD3
Output, Income


Aggregate Supply
The relationship between the quantity of output
supplied and the price level
Long-run AS is a vertical line because of complete
price flexibility assertion
Short-run AS is a horizontal line because of price
inflexibility assertion


Aggregate Supply
Price level

Long-run AS

Price level

P

Y

Output, Income

Short-run AS

Output, Income


Shift in Aggregate Demand
Price level

In the short-run, a higher AD results in
a greater output at a constant price level.

SRAS
AD2
AD1

Y1 Y2

Output, Income


Shift in Aggregate Demand
In the long-run, a higher AD results in
a higher price level at a constant output.

Price level

LRAS

P2
P1
AD2
AD1

Y

Output, Income


Aggregate Equilibrium
Price level

LRAS

SRAS

P
AD

Y

Output, Income


Effect of Stabilization Policy
An increase in the money supply stimulates the
investment demand, causing AD to increase
Short-run effect: An increase in the level of output (point
A moves to point B)
Long-run effect: The rise in income increases the demand
for goods, resulting in higher prices. As prices rise, output
falls to its natural level (point B moves to point C)


Effect of Stabilization Policy
Results of expansionary policy:
Short-run: output growth
Long-run: higher price level

Price level

LRAS
C

P

A

B

SRAS
AD2

AD1

Y

Output, Income


Effects of a Supply Shock
An increase in the production cost, reduces the shortrun AS
Short-run effect: A decrease in the level of output and a
higher price level (point A moves to point B)
Long-run effect: The decline in income decreases the
demand for goods, resulting in lower prices. As prices
fall, output rises to its natural level (point B moves
back to A)


Effects of a Supply Shock
Results of supply shock:
Short-run: output decline and price increase
Long-run: higher price level

Price level

LRAS
B

P

SRAS2
A

SRAS1

AD1

Y

Output, Income


Accommodating Supply Shock
The offset the short-run output decline, the central
bank can increase the money supply to shift the AD
up
The long-run effect is a permanent price increase


Accommodating Supply Shock
Price level

LRAS
C

SRAS2

A

SRAS1
AD2
AD1

Y

Output, Income



x

Tài liệu bạn tìm kiếm đã sẵn sàng tải về

Tải bản đầy đủ ngay

×