8 - macro econ

• Exogenous change in the price level

  Shifts the AE curve and changes the equilibrium level of real GDP

  
• Aggregate demand (AD) curve

  As the price level rises from P0 to P1 to P2 , the AE curve shifts downward from AE0 to AE1 to AE2

  A change in the price level causes a shift of the AE curve but a movement along the AD curve.

  
• Derivation of the AD curve

  1. As the price level rises, the AE curve shifts downward

  2. A movement occurs up along the AD curve

  
• Aggregate demand shock


  Any change that causes the AE curve to shift, also causing the AD curve to shift
• Increase in autonomous aggregate expenditure

  Shifts the AE curve upward and the AD curve to the right

  
• Fall in autonomous aggregate expenditure

  Shifts the AE curve downward and the AD curve to the left

  
• Simple multiplier


  Measures the horizontal shift in the AD curve in response to a change in autonomous desired expenditure

  
• Aggregate supply (AS) curve

  Curve showing the relation between the price level and the quantity of aggregate output supplied, for given technology and factor prices

  
• As output increases, less efficient standby plants may have to be used, and less efficient workers may have to be hired, while existing workers may have to be paid overtime rates for additional work
• For these reasons, unit cost, which is cost per unit of output, increases
• Aggregate supply shock


  Shifts in the AS curve caused by exogenous forces
• Rise in factor prices


  Causes the AS curve to shift leftward
• Fall in factor prices

  Causes the AS curve to shift rightward
• Improvement in technology


  Causes the AS curve to shift rightward
• Deterioration in technology


  Causes the AS curve to shift leftward
• Macroeconomic equilibrium


  Demand behaviour is consistent with supply behaviour only at the intersection of the AS and AD curves
• Aggregate demand shock


  A shift in the AD curve
• Aggregate supply shock


  A shift in the AS curve
• Aggregate demand and aggregate supply shocks are labelled according to their effect on real GDP

  
• Positive shocks increase equilibrium GDP; negative shocks reduce equilibrium GDP
• Aggregate demand shocks


  Cause the price level and real GDP to change in the same direction

  
• Increase in autonomous expenditure

  Causes the AE curve to shift upward, but the rise in the price level causes it to shift part of the way down again
• Effect of any given shift in AD

  Will be divided between a change in Y and a change in P
• Steeper the AS curve

  The greater the price effect and the smaller the output effect
• Aggregate supply shocks


  Cause P and Y to change in opposite directions
• Negative supply shock


  Shifts the AS curve leftward, and the rise in the price level shifts the AE curve downward
• The combined effect of the negative AS shock and the negative AD shock from the COVID-19 pandemic was a sharp reduction in output and employment
• Once individuals are able to safely return to their workplaces, the AS shock will reverse relatively quickly
• Once stores, restaurants, airlines, and hotels are able to safely conduct business, households and firms will return to their normal level of demand. The AD shock will reverse relatively quickly
• Many economic events ‒ especially changes in the world price of raw materials ‒ cause both aggregate demand and aggregate supply shocks in the same economy
• The overall effect on real GDP in that economy depends on the relative importance of the demand-side and supply-side effects
• fiscal policy is used when there are fluctuations in aggregate demand, such as recessions or depressions
• the government can use fiscal policy to influence the economy by changing taxes or spending
• expansionary fiscal policy increases AD while contractionary fiscal policy decreases AD
• monetary policy is used when there are fluctuations in aggregate supply, such as inflationary gaps
• monetary policy is used when there are fluctuations in aggregate supply, such as inflationary gaps or deflationary gaps
• the government can use fiscal policy to increase aggregate demand by increasing government spending (G) or reducing taxes (T)
• Exogenous Changes in the Price Level – Changes in Consumption

  • Much of the private sector’s total wealth is held in the form of assets with a fixed nominal value.
  • The most obvious example is money.
  • What this money can buy—its real value—depends on the price level.
  • A rise in the price level lowers the real value of money held by the private sector, and a fall in the price level raises the real value of money held by the private
• Changes in Consumption

  Changes in the price level change the wealth of bondholders and bond issuers, but because the changes offset each other, there is no change in aggregate wealth.
• a rise in the price level leads to a reduction in the real value of the private sector’s wealth.