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ch9 Lecture & Textbook Notes

The document provides lecture and textbook notes on macroeconomic concepts including aggregate demand, aggregate supply, expansions, recessions, and equilibrium. It defines key terms and explores how shifts in aggregate demand and supply curves can cause fluctuations in the economy in both the short-run and long-run.

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15 views

ch9 Lecture & Textbook Notes

The document provides lecture and textbook notes on macroeconomic concepts including aggregate demand, aggregate supply, expansions, recessions, and equilibrium. It defines key terms and explores how shifts in aggregate demand and supply curves can cause fluctuations in the economy in both the short-run and long-run.

Uploaded by

47fwhvhc6k
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 9 (Lecture Notes and Textbook Notes)


Tuesday, March 14, 2023
Birdget O’Shaughnessy
ECON 1BB3 C02

Lecture Notes (Tuesday, March 14, 2023)


Expansion
 Low unemployment
 Upward pressure on wages
 Entice workers into labour force or pull them from other firms

 ( WP ) ↑
 Labour becomes expensive

Recession
 High unemployment
 Downward pressure on wages

 ( WP ) ↓
 Labour becomes inexpensive
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Textbook Notes (pg 255-290)


9.1 Aggregate Demand
 Aggregate demand and aggregate supply model = model that explains short-run fluctuations in
real GDP/price level
 Price level = measure of average price of goods/services in economy

 Aggregate demand (AD) curve = relationship b/t price level and quantity of real GDP demand by
households, firms, and govt
 Short-run aggregate supply (SRAS) curve = shows relationship in short run b/t price level and
quantity of real GDP supplied by firms

Why is the aggregate demand curve downward sloping?


 GDP /Y =C+ I +G+ NX
 Fall in price level increases quantity of real GDP demanded
 Govt purchases determined by policy decisions of lawmakers and not influenced by changes in
price level

Wealth effect: how change in price level affects consumption


 Income most important variable determining household consumption
 Household’s wealth = difference b/t value of assets and debts
 Nominal assets = assets that loose value as price level rises and gain value as price level falls
 Real value = higher price levels lead to low consumption spending by households
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 Impact of price level on consumption = wealth effect, and is one reason aggregate demand
curve downward sloping

Interest-rate effect: how change in price level affects investment


 When price level rises, households and firms increase amount of money hold by withdrawing
funds from banks, borrowing from banks, or selling financial assets

International-trade effect: how change in price level affects net exports


 Net exports = spending by foreign households and firms and goods and services produced in
Canada minus spending by Canadian
 Price level in Canada ↑, Canadian exports become more expensive, and foreign-made products
less expensive
 Impact of price level on net exports = international-trade effect

Shifts in aggregate demand curve vs movements along it


 Tells relationship b/t price level and quantity of real GDP demanded, holding everything else
constant
 Movement = variable that changed on x-axis/y-axis
 Shift = variable that changed isn’t on either axes
 Variables that shift
1. Changes in govt policy
 Monetary policy = actions BOC takes to mange money supply and interest rates
to peruse macro policy goals/objectives
 Fiscal policy = changes in federal taxes and purchases that are intended to
achieve macro policy objectives
2. Changes in expectations of households and firms
 More money means higher spending = shift right
3. Changes in foreign variables
 Buying more foreign goods = shift left
 Changes in exchange rate
 Increase in net exports shift right
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9.2 Aggregate Supply


 Shows effect of changes in price level on quantity of goods/services that firms willing/able to
provide

Long-run aggregate supply curve


 Level of real GDP determined by supply of inputs—labour force and capital stock—and available
tech
 Potential GDP = level of real GDP attained when all firms producing at capacity
 Firms operate at normal level of capacity, and unemployment will be structural and
frictional
 Not influenced by changes in price level
 Long-run aggregate supply (LRAS) curve = curve that shows relationship in long run b/t price
level and quantity of real GDP supplied
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Short-run aggregate supply curve


 LRAS curve upward sloping
 As prices of final goods and services rise, prices of inputs rise more slowly
 As price levels change firms slow to adjust prices
 Some firms and workers fail to accurately predict changes in price level
 Contracts make some wages and prices "sticky"
 Prices/wages “sticky” when don't respond quickly to changes in demand/supply
 Firms often slow to adjust wages
 Menu costs make some prices sticky
 Menu costs = costs to firms of changing prices

Shifts of short-run aggregate supply curve vs movements along it


 Short-run aggregate supply curve tells short-run relationship b/t price level and quantity of
goods/services firms willing to supply, holding everything constant
 If price level changes economy move up/down stationary aggregate supply curve
 Any variable other than the price level changes, aggregate supply curve shift

Variables that shift short-run aggregate supply curve


1. Increases in labour force and in capital stock
 Labour force and capital stock grow, firms supply more output at every price
 Supply curve shift right
2. Tech change
 Increase productivity reduces firms' costs of production and allows to produce more at
every price
 Supply curve shift right
3. Expected changes in future price level
 Adjust wages and prices accordingly
 Workers and firms expect price level to increase by certain %, SRAS curve shift by that
amount
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4. Adjustments of workers and firms to errors in past expectations about price level
 Shift left = adjusting price level being higher than expected
 Shift right = adjusting to the price level being lower than expected
5. Unexpected changes in price of important natural resource
 Supply shock = unexpected event that causes short-run aggregate supply curve to shift
 Caused by unexpected increases/decreases in prices of natural resources

9.3 Macroeconomic Equilibrium in the Long Run and the Short Run
 In long-run macroeconomic equilibrium, AD and SRAS curves intersect at point on LRAS curve
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Recessions, expansions, and supply shocks


 Begin with simplified case, using 2 assumptions
1. Economy not been experiencing any inflation
2. Economy not experiencing any long-run growth
 Assumptions are simplifications to focus on main idea

Short-run effect of a decline in aggregate demand


 Decline in investment that results will shift the aggregate demand curve to the left
 Economy moves from A to new short-run macro equilibrium, where curve intersects SRAS curve
at B
 Lower level of GDP result in declining profitability for many firms and layoffs for some workers =
recession

Adjustment back to potential GDP in long run


 Firms willing to accept lower prices due to lower sales
 Unemployment resulting from recession make workers willing to accept lower wages
 Decline in aggregate demand causes recession in short run, but long run causes only decline in
price level
 Automatic mechanism = process of adjustment back to potential GDP
 Occurs without actions by govt

Expansion the short-run effect of an increase in aggregate demand


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 Firms operating beyond normal capacity, and some who would be structurally or frictionally
unemployed/who would not be in labour force are employed

Adjustment back to potential GDP in the long run


 Workers and firms adjust to price level being higher than they had expected
 Workers push for higher wages and firms charge higher prices
 Easier for workers to negotiate for higher wages, and increase demand easier for firms
to increase prices
 SRAS will shift to left

The short-run effect of a supply shock


 Stagflation = combination of inflation and recession, usually resulting form supply shock

Adjustment back to potential GDP in long run


 Recession caused by supply shock increases unemployment and reduces output
 Workers willing to accept lower wages and firms accept lower prices

9.4 A Dynamic Aggregate Demand and Aggregate Supply Model


 Make changes to basic model to be more accurate
1. Potential GDP increases continually, shifting long-run aggregate supply curve right
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2. Aggregate demand curve shifts right


3. Except during periods when workers and firms expect high rates of inflation, short-run
aggregate supply curve shifts right

 Increases in labour force and capital stock as well as tech change cause long-run aggregate
supply curve to shift over year

 Aggregate demand shift spending by consumers, firms, and govt increases during year

 Changes in price level and real GDP in short run determined by shifts in SRAS and AD curves

What is usual cause of inflation?


 If AD curve shifts to right > LRAS curve = inflation b/c equilibrium occurs at higher price level
 Shift to left of short-run aggregate supply curve also cause increase in price level
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