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Chapter 8 --- Macroeconomics

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Ciaran Fitzpatrick

on 27 May 2014

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Transcript of Chapter 8 --- Macroeconomics

Chapter 8
Aggregate Demand
and
Aggregate Supply
Business (Trade) Cycle
Business (Trade) Cycle
Fluctuations in the growth of Real output
Expansion
increasing Real output-- positive GDP growth
Peak
Max level of Real GDP-- end of expansion
Contraction
Falling Real GDP (negative growth)
Period last more than 6 months
Trough
Minimum level of GDP
High unemployment followed by expansion
Business Cycle is not regular or predictable
Relationship between Real GDP
and
Unemployment
Real GDP increases --- Expansion Phase ---Firms increase output --- Unemployment decreases
Real GDP decreases --- contraction phase --- firms decrease output --- unemployment increases
Full Employment Level of Output
Every economy has a level of Real GDP where there is "
full employment
"
"
Full employment
"does not mean that unemployment is zero
Unemployment that occurs when an economy experiences "
full employment
"is the
natural rate of unemployment
Actual & Potential
GDP
Real GDP
: cyclical line represents actual GDP achieved
Refers to "short term economic fluctuations"
Potential GDP
: straight line represents average growth over long periods of time
Economy's full level of employment or potential output
Actual GDP = Potential GDP
Full employment = Natural Rate of Unemployment
Red line represents actual GDP
Actual GDP > Potential GDP
Output gap
: Actual GDP - Potential GDP
Unemployment < Natural rate of Unemployment
Actual GDP < Potential GDP
Output gap
: Unemployment > Natural Rate Uemployment
Potential GDP = Full employment GDP
Unemployment = Natural Rate of Unemplyment
Business Cycle
Macroeconomic Objective
1. Reduce the intensity of expansion/contraction
Make GDP gap (output gap) as small as possible
Flatten cyclical curve
2. Increasing the steepness of the potential output line
Achieves more rapid Economic growth over long periods of time
Aggregate Supply/Demand
Aggregate Demand
Total quantity of goods/services that all buyers in an economy want to buy
Relationship between Real GDP and Price levels
Aggregate Demand includes:
Consumers (C)
Business (I)
Government (G)
Exports - Imports (M)
Similar to GDP, but not the same.
Aggregate Demand plots the amount of real GDP at different price levels
Changes (Shifts) in Aggregate Demand
Right shift in AD indicates a
LARGER
amount of Real GDP is demanded
Left shift in AD indicates a
SMALLER
amount of Real GDP is demanded
Shifts can be caused by any factor that produces a change in:
Consumer (C)
Investment Spending (I)
Government Spending (G)
Net Export (X-M)
Consumer Spending
Changes in Wealth
Expectations of Future Income or Future of the Economy
Changes in Interest Rates
Change in Personal Income Tax
Change in Household indebtness
Change in attitude of spending
Changes in Wealth
Value of assests (home, stock market, Art)
Increase in wealth --- Right shift in AD
Decrease in wealth --- Left shift in AD
Aggregate Demand
Consumer Spending
Changes in Interest Rates
Increase in Interest Rates --- Lower Consumer Spending --- Left shift in AD
Decrease in Interest Rates --- Increase in Consumer Spending --- Right shift in AD
Changes in Personal Income Tax
Increase in Income Tax --- Decrease in disposable Income --- Left shift in AD
Decrease in Income Tax --- Increase in disposable Income ---Right shift in AD
Change of Household Indebtness (loans)
Increse in Debt --- Decrease in Disposable Income --- Left shift in AD
Decrease in Debt --- Increase in Disposable Income --- Right shift in AD
Expectations in Future Income or Future of the Economy


Change in attitude to Spending
Investment Spending
Future Sales
Increase in optimism of Future Sales --- Increase in Spending --- Right shift in AD
Decrease in optimism --- Decrease in Spending --- Left shift in AD
Technology
Improvement in technology --- Increase in Spending --- Right shift in AD
Interest Rates
Increase in Interest Rates --- Increase in cost to borrow --- Decrease in Investment Expenditure --- Left shift in AD
Decrease in Interest Rates --- Decrease in cost to borrow --- Increase in Investment Expenditure --- Right shift in AD
Business Tax
Increase in Tax --- Decrease in Investment spending --- Right shift in AD
Decrease in Tax --- Increase in Investment spending --- Left shift in AD
Government Spending
--- (Determinant)
Political Priorities
Increase in Spending --- Right shift in AD
Decrease in Spending --- Left shift in AD
Export - Import Spending
--- (Determinant)
Changes in Real National Income abroad
Increase in Country B Real National Income --- Increase in Country A exports --- Right shift in AD
Decrease in Coutnry B Real National Income --- Decrease in Country A exports --- Left shift in AD

Changes in exchange rates
Increase in Country A currency (relative to Country B) --- Decrease in imports to Country A (more expensive) --- Left shift in AD
Decrease in Country A currency --- Increase in Country B imports from A --- Right shift in AD
Full transcript