OAC Economic Seminar CHAPTER #12 Economic Fluctuations

Aggregate Demand The relationship between the general price level & total spending in the economy 4 components: Consumption, Investment, Government Purchases, Net Exports Groups response this spending: Households, Businesses, Governments, Foreigners

Real Expenditures Total spending in an economy, adjusted for changes in the general price level It is calculated using the GDP deflator Price Level influences real expenditures

The Aggregate Demand Curve The relationship between the general price level and total spending in the economy expressed on a graph Price variable is placed on the vertical axis Output variable is placed on the horizontal axis

Aggregate Demand

Wealth Price level (  or  )  financial assets (same) Price level (  or  )  real values (  or  ) Real Value of financial assets = norminal value of financial assets / price level Wealth effect –wealth  consumption 

Foreign Trade Foreign trade effect – with changes in the price level, expenditures on imports change in the same direction, while expenditures on exports change in the opposite direction

Changes in Aggregate Demand Aggregate demand factors – variables that cause changes in total expenditures at all price levels It shifts the curve either to right or left

Changes in Aggregate Demand

4 components - Consumption Disposable Income Wealth Consumer Expectations Interest Rates

Investment Real rate of return – the constant dollar extra profit provided by the project each year stated as a % of the project’s initial cost

Investment Demand

Investment (cont’d) Investment Demand – relationship b/w interest rates & investment Interest Rates Business Expectations Production Costs

Government Purchases Government purchases (  or  ) causes aggregate demand (  or  )

Net Exports Foreign Incomes Exchange Rates – the value of one nation’s currency in terms of another currency

Aggregate Supply The relationship between the general price level and real output produced in the economy.

Aggregate Supply Aggregate Supply schedule and aggregat supply curve are the aggregate supply expressed on a table and graph.

Factors that influence Aggregate Supply 1. Input Prices 2. Resource Supplies 3. Productivity 4. Government Policies

Input Prices A decrease in input proces due to a fall in wages and raw material prices. Aggregate supply increases, then the curve shifts to the right, and potential output increases. It is called a short run increase in aggregate A increase in input proces due to a rise in wages and raw material prices. Aggregate supply decreases, then the curve shifts to the left, and potential output decreases. It is called a short run decrease in aggregate

A Shot-Run Change in Aggregate Supply An example of the short run increase in aggregate supply

Resource Supplies For the long term, there can be supplies increases due to the increased in labour supply, capital stock, land natural resources and entrepreneurship. It is called a long run increase in aggregate supply Also, they can be reversed, everything has devreased so there will be a decreased in supplies of evonomic resourves. It is called a long run devrease in aggregate supply.

A Long-Run Change in Aggregate Supply An example of long run increase in aggregate supply

Productivity Labout Productivity = Real output/ total hours worked Increases in productivity are due to technological progress. A technological innovation raises productivity when there is same amount of resources can produce more real output. It causes the long run increased in aggregate supply. In the opposite side, if a technological decline reduces the real output with the same resources, then it will have a long run decrease in aggregate supply

Government Policies When there is a lower taxes and less government regulation changed by the government, it will have a increase in aggregate supply. When there is a higher taxes and more government regulation changed by the government, the companies will have decreases in their aggregate supply.

Crystal Ball Economics Statistical Models are composed of equations that summarize macroeconomic behaviour in numbrical terms. Composite Index is calculated monthly, and is a weighted average of 10 leading indivators.  leading indicators show movement the precedes changes in the GDP, lagging indicators show mvement that follows changes in the GDP

GDP and Index of Leading Indicators (third quarter 1989 =100)