Key concepts chapters 9 – 12! Homework Chapters u Chapter 11 - Bonus - Friday January 27. u Chapter 12 - Bonus – Wednesday, February 1. u Tentative Test Day Friday, February 3rd. u Hold on here we go!!!

Key concepts chapters 9 – 12! Homework Chapters u Test Day - Next Friday u Approximate number of questions per chapter. u Chapter 9 – 10 Questions u Keynesian Cross, MPC, Savings + Consumption = DI u Chapter 10 – 10 Questions u Simplified, Tax, and Balanced Budget Multipliers u Chapter 11 – 25 Questions u AD, AS, LRAS u Chapter 12 – 15 Questions u Fiscal Policy: Expansion, Contraction, Automatic, & Discretionary

Key concepts chapters 9 – 12! Aggregate Demand And Aggregate Supply Aggregate Demand And Aggregate Supply CHAPTER ELEVEN

Key concepts chapters 9 – 12! Aggregate Demand:...the various amounts of goods and services - the amounts of real output - that domestic consumers, businesses and foreign buyers collectively desire to purchase at each possible price level

Key concepts chapters 9 – 12! Aggregate Demand:...is downsloping because of:

Key concepts chapters 9 – 12! Aggregate Demand:...is downsloping because of: 1 - Wealth Effect (Real Balances) A higher price level reduces the purchasing power of the general public’s financial assets. Remember the arbitrary and capricious nature of inflation??? That one was for you Sean!

Key concepts chapters 9 – 12! Aggregate Demand:...is downsloping because of: 1 - Wealth Effect (Real Balances) 2 - Interest-Rate Effect When the supply of money is fixed, as price levels rise interest rates increase because as the demand for $ increases the price paid for its use also increases.

Key concepts chapters 9 – 12! Aggregate Demand:...is downsloping because of: 1 - Wealth Effect (Real Balances) 2 - Interest-Rate Effect 3 - Foreign Purchases Effect As prices go up in the U.S, our goods become more expensive, Thus reducing the amount of exports and increasing imports.

Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 1 1’ (C a + I g + X n + G) 1 at P 1 Real GDP at price level 1 Deriving the Aggregate Demand Curve

Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 1 1’ (C a + I g + X n + G) 1 at P 1 Real GDP at price level 1 What if prices go up? What if prices go up? Deriving the Aggregate Demand Curve

Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 (C a + I g + X n + G) 1 at P 1 1 1’ P2P2 GDP 2 (C a + I g + X n + G) 2 at P 2 2 2’ A Lower Real GDP Exists at price level 2 Deriving the Aggregate Demand Curve

Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 (C a + I g + X n + G) 1 at P 1 1 1’ P2P2 GDP 2 (C a + I g + X n + G) 2 at P 2 2 2’ A Lower Real GDP Exists at price level 2 What if prices go up again? What if prices go up again? Deriving the Aggregate Demand Curve

Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 (C a + I g + X n + G) 1 at P 1 1 1’ P2P2 GDP 2 (C a + I g + X n + G) 2 at P 2 2 2’ (C a + I g + X n + G) 3 at P 3 3 P3P3 3’ A Still Lower Real GDP Level Exists at price level 3 Deriving the Aggregate Demand Curve

Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 (C a + I g + X n + G) 1 at P 1 1 1’ P2P2 GDP 2 (C a + I g + X n + G) 2 at P 2 2 2’ (C a + I g + X n + G) 3 at P 3 3 P3P3 3’ The Aggregate Demand Can Be Constructed Deriving the Aggregate Demand Curve

Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 (C a + I g + X n + G) 1 at P 1 1 1’ P2P2 GDP 2 (C a + I g + X n + G) 2 at P 2 2 2’ (C a + I g + X n + G) 3 at P 3 3 P3P3 3’ The Aggregate Demand Can Be Constructed

0 Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD Can increase...

0 Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 2

0 Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD Can decrease... AD 2

0 Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 3 AD 2

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer wealth

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer expectations Consumer expectations

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer expectations Consumer indebtedness Consumer indebtedness

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer expectations Consumer indebtedness Taxes Taxes

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer expectations Consumer indebtedness Taxes Change in Investment Spending

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer expectations Consumer indebtedness Taxes Change in Investment Spending Interest rates Interest rates

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer expectations Consumer indebtedness Taxes Change in Investment Spending Interest rates Profit expectations on investment projects Profit expectations on investment projects

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer expectations Consumer indebtedness Taxes Change in Investment Spending Interest rates Profit expectations on investment projects Technology Technology

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer wealth Consumer expectations Consumer indebtedness Taxes Change in Investment Spending Interest rates Profit expectations on investment projects Technology Degree of excess capacity – Inventory! Degree of excess capacity – Inventory!

Key concepts chapters 9 – 12! Change in Government Spending DETERMINANTS OF AGGREGATE DEMAND

Key concepts chapters 9 – 12! Change in Government Spending DETERMINANTS OF AGGREGATE DEMAND Change in Net Export Spending

Key concepts chapters 9 – 12! Change in Government Spending DETERMINANTS OF AGGREGATE DEMAND Change in Net Export Spending National income abroad National income abroad

Key concepts chapters 9 – 12! Change in Government Spending DETERMINANTS OF AGGREGATE DEMAND Change in Net Export Spending National income abroad Exchange rates Exchange rates illustrated...

Changes in the Aggregate Demand Curve Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 (C a + I g + X n + G) 1 at P 1 An Increase in Aggregate Demand An Increase in Aggregate Expenditures AD 1

Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 (C a + I g + X n + G) 2 at P 1 GDP 2 (C a + I g + X n + G) 1 at P 1 An Increase in Aggregate Demand An Increase in Aggregate Expenditures AD 1 AD 2 Changes in the Aggregate Demand Curve

Key concepts chapters 9 – 12! Aggregate Supply:...the level of real domestic output which will be produced at each price level

Key concepts chapters 9 – 12! Aggregate Supply:...has three ranges:

Key concepts chapters 9 – 12! Aggregate Supply:...has three ranges: 1 - Horizontal Range

Key concepts chapters 9 – 12! Aggregate Supply:...has three ranges: 1 - Horizontal Range 2 - Vertical Range

Key concepts chapters 9 – 12! Aggregate Supply:...has three ranges: 1 - Horizontal Range 2 - Vertical Range 3 - Intermediate (Upsloping) Range

Price level Real domestic output, GDP Q P HorizontalRange Upsloping or IntermediateRange VerticalRange As developed in chapter 8...

Price level Real domestic output, GDP Q P An Increase in Aggregate Supply AS 1

Price level Real domestic output, GDP Q P AS 1 AS 2 An Increase in Aggregate Supply

Price level Real domestic output, GDP Q P AS 1 AS 2 A Decrease in Aggregate Supply

Price level Real domestic output, GDP Q P AS 1 AS 2 AS 3 A Decrease in Aggregate Supply

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY When per unit production costs change firms will alter the amount they produce at each level. What would cause the per unit production costs to change?

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic resource availability Domestic resource availability

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic resource availability Domestic resource availability Land Land

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic resource availability Domestic resource availability Land Land Labor Labor

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic resource availability Domestic resource availability Land Land Labor Labor Capital – (Expectations) Capital – (Expectations)

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic resource availability Domestic resource availability Land Land Labor Labor Capital Capital Entrepreneurial ability Entrepreneurial ability

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic resource availability Domestic resource availability Land Land Labor Labor Capital Capital Entrepreneurial ability Entrepreneurial ability Change in Productivity

Key concepts chapters 9 – 12! DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic resource availability Domestic resource availability Land Land Labor Labor Capital Capital Entrepreneurial ability Entrepreneurial ability Change in Productivity Productivity = real output input

Key concepts chapters 9 – 12! Change in legal-institutional environment DETERMINANTS OF AGGREGATE SUPPLY

Key concepts chapters 9 – 12! Change in legal-institutional environment Business taxes and subsidies Business taxes and subsidies DETERMINANTS OF AGGREGATE SUPPLY

Key concepts chapters 9 – 12! Change in legal-institutional environment Business taxes and subsidies Business taxes and subsidies Government regulation Government regulation DETERMINANTS OF AGGREGATE SUPPLY

Price level Real domestic output, GDP Q P The Equilibrium Price Level and the Equilibrium Real GDP The Equilibrium Price Level and the Equilibrium Real GDP AS AD Equilibrium in the intermediate range QeQe Q1Q1 Q2Q2

Price level Real domestic output, GDP Q P The Equilibrium Price Level and the Equilibrium Real GDP The Equilibrium Price Level and the Equilibrium Real GDP AS AD Equilibrium in the horizontal range QeQe Q1Q1 Q2Q2

Price level Real domestic output, GDP Q P The Equilibrium Price Level and the Equilibrium Real GDP The Equilibrium Price Level and the Equilibrium Real GDP AS Equilibrium in the horizontal range Q1Q1 AD 1

Price level Real domestic output, GDP Q P The Equilibrium Price Level and the Equilibrium Real GDP The Equilibrium Price Level and the Equilibrium Real GDP AS Equilibrium in the horizontal range Q1Q1 AD 1 AD 2 Q2Q2

Price level Real domestic output, GDP Q P The Equilibrium Price Level and the Equilibrium Real GDP The Equilibrium Price Level and the Equilibrium Real GDP AS Equilibrium in the intermediate range Q1Q1 AD 1 P1P1

Price level Real domestic output, GDP Q P The Equilibrium Price Level and the Equilibrium Real GDP The Equilibrium Price Level and the Equilibrium Real GDP AS AD 2 Equilibrium in the intermediate range Q1Q1 Q2Q2 AD 1 P1P1 P3P3

Price level Real domestic output, GDP Q P The Equilibrium Price Level and the Equilibrium Real GDP The Equilibrium Price Level and the Equilibrium Real GDP AS P1P1 Equilibrium in the vertical range QcQc AD 1 P5P5

Price level Real domestic output, GDP Q P The Equilibrium Price Level and the Equilibrium Real GDP The Equilibrium Price Level and the Equilibrium Real GDP AS P1P1 AD 2 Equilibrium in the vertical range QcQc AD 1 P5P5 P6P6

Price level Real domestic output, GDP Q P The Multiplier with Price Level Changes The Multiplier with Price Level Changes AS AD 2 GDP 1 GDP 2 AD 1 P1P1 P3P3 GDP 3 } } Full Multiplier Full Multiplier Reduced Multiplier Reduced Multiplier

Price level Real domestic output, GDP Q P The Ratchet Effect AS AD 2 Q1Q1 Q2Q2 P1P1 P3P3 Q3Q3 AD 1 / 3 Why the ratchet? next... a b c Illustrates the down- ward inflexibility of prices.

Key concepts chapters 9 – 12! CausesCauses CausesCauses The Ratchet Effect

Key concepts chapters 9 – 12! CausesCauses CausesCauses Wage Contracts The Ratchet Effect

Key concepts chapters 9 – 12! CausesCauses CausesCauses Wage Contracts Morale & Productivity Wage Contracts Morale & Productivity The Ratchet Effect

Key concepts chapters 9 – 12! CausesCauses CausesCauses Wage Contracts Morale & Productivity Efficiency Wages Wage Contracts Morale & Productivity Efficiency Wages The Ratchet Effect

Key concepts chapters 9 – 12! CausesCauses CausesCauses Wage Contracts Morale & Productivity Efficiency Wages Training Investments Wage Contracts Morale & Productivity Efficiency Wages Training Investments The Ratchet Effect

Key concepts chapters 9 – 12! CausesCauses CausesCauses Wage Contracts Morale & Productivity Efficiency Wages Training Investments Minimum Wage Wage Contracts Morale & Productivity Efficiency Wages Training Investments Minimum Wage The Ratchet Effect

Key concepts chapters 9 – 12! CausesCauses CausesCauses Wage Contracts Morale & Productivity Efficiency Wages Training Investments Minimum Wage Menu Costs Menu Costs Wage Contracts Morale & Productivity Efficiency Wages Training Investments Minimum Wage Menu Costs Menu Costs The Ratchet Effect

Key concepts chapters 9 – 12! CausesCauses CausesCauses Wage Contracts Morale & Productivity Efficiency Wages Training Investments Minimum Wage Menu Costs Fear of Price Wars Fear of Price Wars Wage Contracts Morale & Productivity Efficiency Wages Training Investments Minimum Wage Menu Costs Fear of Price Wars Fear of Price Wars The Ratchet Effect

Price level Real domestic output, GDP Q P Shifting Aggregate Supply AS 1 AS 3 AS 2 AD 1 a b c Q1Q1 Q2Q2 P1P1 P2P2 Q3Q3 P3P3 Cost-pushinflation EconomicGrowth

Price level Real domestic output, GDP Q P Shifting Aggregate Supply AS 1 AS 3 AS 2 AD 1 a b c Q1Q1 Q2Q2 P1P1 P2P2 Q3Q3 P3P3 Cost-pushinflation ANY QUESTIONS? ANY QUESTIONS?

u aggregate demand u wealth effect u interest-rate effect u foreign purchases effect u determinants of aggregate demand u aggregate supply u horizontal range u vertical range u aggregate demand u wealth effect u interest-rate effect u foreign purchases effect u determinants of aggregate demand u aggregate supply u horizontal range u vertical range u intermediate range u determinants of aggregate supply u productivity u equilibrium price level u equilibrium real domestic output u ratchet effect u efficiency wages u menu costs u intermediate range u determinants of aggregate supply u productivity u equilibrium price level u equilibrium real domestic output u ratchet effect u efficiency wages u menu costs

Key concepts chapters 9 – 12! Coming next.... FISCAL POLICY Chapter 12