Macroeconomic Equilibrium The AD-AS Model. Aggregate Demand Just as we can determine a demand curve for a particular good or service, we can also determine.

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Presentation transcript:

Macroeconomic Equilibrium The AD-AS Model

Aggregate Demand Just as we can determine a demand curve for a particular good or service, we can also determine an Aggregate Demand Curve that represents demand in the macro economy In this case, it is the demand for a certain level of output (GDP) at a particular price level

Shift in Aggregate Demand Changes in Expectations – Greater optimism leads to more spending at any given price level Changes in Wealth – As household assets increase in value, people feel free to spend more at any given price level

Figure 17.2 Shifts of the Aggregate Demand Curve Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Short-Run Aggregate Supply (SRAS) Upward sloping, just as in market case – But again for different reasons Profits = Price of Outputs – Price of Inputs – Revenue generated by price increases outpaces increases in input costs (wages are “sticky”) – So, in the short-run curve slopes upwards Reverse is also true

Changes in SRAS 1.Changes in commodity prices – Oil; steel – Decrease in commodity prices = increase in SRAS 2.Changes in nominal wages – Increase in nominal wages = decrease in SRAS 3.Change in productivity – Increases in productivity = increase in SRAS

Figure 18.2 Shifts of the Short-Run Aggregate Supply Curve Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Long-Run Aggregate Supply (LRAS) In the longer term, “sticky” input prices “catch up” to output prices Therefore, in the long run, price level should have no affect on aggregate supply So, aggregate supply would be a vertical line

Long-Run Aggregate Supply What is the significance of the output value (Y) at which the LRAS is vertical? The answer is the economy’s potential output –YP–YP – This represents the level at which the economy would produce if all prices (including wages) were perfectly flexible

Figure 18.4 Actual and Potential Output from 1989 to 2009 Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 19.4 Long-Run Macroeconomic Equilibrium Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers Long-Run Macroeconomic Equilibrium