Aggregate Supply and Demand Graph

Macro 3.2- Aggregate Supply Practice

Aggregate Supply

Long run vs. Short run

• Long run: period of time where imput prices are flexible and adjust to changes in price level
• The level of real GDP supplied is independent of the price level
• (Vertical at full employment)
• SHORT RUN: (goes to the sky)
• period of time where input prices are sticky and do not adjust to changes in price level
• level of real GDP supplied is directly related to price level

Changes in Short Run Aggregate Supply

• An inc in SRS is seen as a shift rk the right. SRAS →
• A Decrease in SRAS is seen as a shift to the left. SRAS ←
• The key to understanding shifts SRAS is per unit cost of production
• Per unit cost of production=total input cost/total output

Determinants of SRS

Input Prices:

• deals with wages (75 percent) & raw materials, foreign resource prices (ex: strong $ = lower foreign resource price), and marker power (ex: monopoly)
•  increase in resource Prices=SRAS decrease ←
•  decrease in resources prices = SRAS inc →

Productivity

• Productivity=total output/total input
• more productivity = lower unit production cost = SRAS →
• Lower productivity = higher unit production cost = SRAS ←

Legal-Institutional Environment

• Taxes & Subsidies
• Taxes ($ to gov't) on business increase per unit production cost = SRAS ←
• Subsidies ($ from Gov't) to business reduce per unit production cost=SRAS →
• Gov't Regulations
• Gov't Regulations creates a cost of compliance = SRAS ←
• Deregulation reduces compliance cost = SRAS →

Full Employment

• Full employment equilibrium exists where the AD intersects SRAS and LRAS at the same point
• Recessionary Gap
• Exists when equilibrium occurs below full employment output
• Inflationary Gap
• Exists when equilibrium occurs beyond full employment output
• AD increase = real GDP, inflation , price level increases (unemployment decreases) 
•  Increase in SRAS ←: real gDP increase; inflation, price level

Macro Aggregate Demand Practice

Aggregate Demand

Aggregate Demand

• Shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price range.
• - The relationship b/w the price kevel and the level of real GDP is inverse.
• (X axis): PL for price level
• (Y axis): GDPr for Real GDP

 Reasons AD is Downward Sloping

• Real balances effects
•  when the price level is high, households and businesses cannot afford to purchase as much output
• When the prices level is low households and businesses can afford to purchase more outputs
• Interest Rate effect
• A higher price level increases the interest rate which tends to discourage investment
• A lower price level decreases the interest rate which tends to encourage investment
• Foreign Purchases effect
• A higher price level increases the demand for relatively cheaper imports
• A lower price level increases the foreign demand for relatively cheaper U.S exports

Shifts in Aggregate Demand (AD)

• There are two parts to a shift in AD
• a change in C, Ig, G and /or Xn
• A multiplier effect that the produces a greater change than the original change in the 4 components
• Increase in AD=AD →
• Decrease in AD = AD ←

Determinants of AD

CONSUMPTION

• House spending is affected by
• Consumer Wealth
•     More wealth = more spending (AD shifts →)
•     Less Wealth = less spending (AD shifts ←)
• Consumer Expectations
•      Positive expectations = more spending (AD shifts →)
•      Negative expectations= less spending (AD shifts ←)
• Household Indebtedness
•      Less debt = more spending (AD shifts →)
•      More debt = less spending (AD shifts ←)
• Taxes
•      Less taxes = more spending (AD shifts →)
•      More taxes = less spending (AD shifts ←)

GROSS PRIVATE INTEREST RATE

• Interest Spending Is Sensitive to:
• The Real Interest Rate
•    Lower interest rate = more investment (AD→)
•    Higher int. Rate = less investment (AD ←)
•    Expected Returns
•      Higher expected returns = more investment (AD→)
•     .Lower exp. Returns = less investment (AD ←)
• . Weak foreign economic = less exports = (AD ←) Returns are Influenced by:
• Expectation of future profitability
• Technology
• Degree of excess Capacity (existing stock of capital)
• Business Taxes

GOVERNMENT SPENDING

• ·More gov't spending (AD →)
• ·Less gov't spending (AD←)

NET EXPORTS

• Net exports are sensitive to:
• Exchange rates (international value of $)
•   Strong $ = more imports and fewer exports = (AD ←)
•   Weak $ = fewer imports and more exports = (AD→)
• -Relative income
• . Strong foreign economic = more exports = (AD→)

GDP and Inflation

GDP

• Market value of all final goods and services produced within a nation in a given year
• Whats not included?
• Intermediate Goods
• Goods that require further processing before final 
• Used (or Second Hand) Goods
• Purely financial Transactions (Stocks and Bonds)
• Unreported business activity
• Illegal Activites
• Nonmarket Activity (Volunteering or Babysitting)
• Transfer Payments. (Scholarships, Welfare etc)
• Whats included?
• C- Personal Consumption Expenditures
• IG- Gross Private Domestic Investments
• New Factory epuipments, Factory Equipment Maintenance etc.
• G- Government Spending (20% of the Economy)
• XN- Net Exports (Exports-Imports)
• Ways to Calculate GDP
• Expenditure Approach
• Add up  all spending on Final Goods and Services produced in a given year
• Formula: GDP=C+IG+G+XN
• Income Approach
• Add up all income that resulted from selling all final goods and services in a given year
• Formula:
  GDP=Wages+Rents+Interest+Corporate Profits+Indirect  Business Tax+Depreciation
• Net Domestic Product: (NDP)
• GDP-Depreciation
• Net National Product: (NNP)
• GNP-Depreciation
• GNP=GDP+Net Foreign Factor Payment
• Budget:
• Gov't purchase of Goods and Services+Tansfer Payments-Gov't Tax and Fee Collection
• If you recieve a number less than zero there is a surplus
• If you recieve a number greater than zero there is a deficit
• Trade:
• Exports-Imports
• If you recieve a figure less than zero there is a Deficit
• If you revieve a figure less than zero there is a Surplus
• National Income
• Comp. of Employee+Rents+Interest+Proprietors income+Corporate Profits
• or, GDP-Indirect Business Taxes-Depreciation-Net foreign factor pay
• Disposable Personal Income
• National Income-Personal Household Taxes+Government Transfer Rights
• Nominal GDP (Inflation)
• Value of output produced in current crisis
• Can increase from year to year if output or price increase
• Real GDP
• Value of output produced in constant or base year crisis
• Adjusted for Inflation
• Can increase from uear to uear only if output increases
• Used to measure real Economic Growth
• GDP deflator





• Price index used to adjust from Nominal to Real GDP
• Nominal GDP/Real GDP x 100
• In base year GDP deflator aleays equals 100
• For years after base year GDP deflator is greater than 100
• For years prior to base year, GDP deflator is less than 100
• Ex:

• Consumer Price Index (CPI)
• Most commonly used measurement for iinflation
• Measures cost of market basket of goods for a typical Urban American Family
• Cost of Market Masket of Goods in given year/Cost of Market basket of Goods in Base year x 100
• Inflation
• Price index in year 2-Price Index in year 1/Price index in year 1 x 100
• Interest Rate 
• Nominal Rate
• % of increase in money the borrower must pay lender for loan
• Not adjusted for Inflation
• Fisher Method: Nominal Interest rates= Expected Interest+Inflation pay
• Real Interest Rate
• % increase in Purchasing power borrower must pay lender for loan
• Adjusted for Inflation
• Nominal Interest Rate-Inflation=Real Interest Rate
• Cost of Living Adjustment (Cola)
• Gives automatic wage increase when inflation occurs
• Unemployment 
• Failure to use available resources, particularly labor, to produce desired goods and services
• Labor force
• 16 years of age
• Able and Willing to Work
• Employed and Unemployed
• Not in Labor Force
• Military
• Students
• Retirees
• Disabled
• Jailed People
• Mental Institutionalized people
• Homemakes
• Those Not looking for work
• Unemployment Rate
• Ideal= 4-5% (Full Employment)
• number of unemployed/number of employed and unemployed
• Type of Unemployment
• Frictional Unemplloyment (Temporarily Unemployed)
• Have transferable skills
• Searching for better opportunity ex: students
• Structural
• Changes in structure of labor force making skill/jobs obsolete
• Don't have transferable skills
• Seasonal Unemploymeny
• Work depends on time of year and nature of job
• ex: school bus drivers 
• Cyclical Unemployments
• Results from economic downturns or recession
• As demand for goods and services fall, demand for labor falls as well
• Frictional + Structural = Natural Rate of unemployement
• Totally unavoidable
• Full employment means there are no Cyclical unemployment 
• GDP Gap
• The amount vy which actual GDP  falls short of Potential GDP
• Okons Law
• For every 1% in which actual unemployement rate exceeds the Natural rate of unemployment a GDP gap of 2% exists
• Rule of 70
• Used to determine the years it takes for a valur to double, given a particular anneal growth rate by deviding 70 by the percentage given.

Circular Flow Video Explanation

http://study.com/academy/lesson/circular-flow-of-economic-activity-the-flow-of-goods-services-resources.html