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Aggregate Demand Video
Transcript
Do you know
Aggregate Demand
during the Great Depression?
the great depression
1929 ~ 1933
Introduction
Negative
Demand Shock
a sudden and unexpected event that decreases the demand for goods and services
Aggregate
Demand
Curve
- AD is NOT the same as Demand
- demand for all goods and services in all markets
Explanation
Aggregate Price Level (GDP Deflator)
1935
wealth, interest rate, net export effect
7.4
Blackboard
6.2
2000
AD
Real GDP(billions of Dollars)
740
1025
SUBJECTS
Determinants
Wealth
Wealth
- 1929--Stock market Crash
- loss of wealth
- the consumer’s purchasing power reduced
- consumer spending fell
- AD shifts to left
Expectation
Expectations
- 1929--Stock market Crash
- loss of wealth
- the consumer’s purchasing power reduced
- consumer spending fell
- AD shifts to left
Size of the existing stock of physical capital
physical capital
- is related to investment spending.
- i.g. an oversupply of houses in the United States
- the size of the existing stock of physical capital is large
- The construction industry has less incentive to build more houses
- The investment spending decreases, shifting the AD to the left.
Fiscal
Policy
Fiscal Policy
- government purchase, transfer, or tax
New Deal (1933-1937)
Methods
- Gov't spending--Direct
- GDP = C+I+G+(E-I)
- Increase in G --> increase in GDP-->Ad shifts to right
- Tax & Transfer -- Indirect
- Decrease in tax
-->increase in disposable income-->AD shifts to right
- Increase in gov't transfer-->increase disposable income-->Ad shifts to right
Monetary
Policy
Monetary Policy
- central bank—-federal reserve using interest rate or quantity of money
Midst Depression
- raise interest rates
- allow a contraction of bank reserves
- Increase in interest rate-->save more in ban to earn profits -->consumer spending decreases-->ad shifts to left
Hold on!
More RELATED Concept!
Multiplier
&
Crowding Out
MULTIPLIER
Multiplier
multiple of spending
DEFINITION
DEFINITION
impact on the output and employment in the economy
indirect effects throughout the entire economy.
EXPLANATION WITH GRAPH
GRAPH
- If the MPC is 0.80, and if the goal is to increase real GDP by $200 million, how much would government spending have to change to generate this increase in real GDP?
CALCULATION
CALCULATION
1/(1-MPC)
1/MPS
- multiplier: 1/(1-MPC) = 1/(1-0.80) = 5
- the goal is $200, in order to calculate the actual government spending, we need to divided by the multiplier effect which is 5,
- $200/5 = $40 million
crowding
out effect
CROWDING
OUT
- rising public sector spending drives down private sector spending by increasing interest rates.
DEFINITION
DEFINITION
real i
PL
AS
S LF
EXPLANATION WITH GRAPH
GRAPH
AD
D LF2
D LF
AD2
RGDP
Q of LF
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