Aggregate Demand and Aggregate Supply Analysis: Powerpoint

PowerPoint
to accompany
Chapter 13
Aggregate
Demand and
Aggregate
Supply Analysis
Learning Objectives
1. Understand what happens during
business cycles and their relationship to
long-run economic growth.
2. Discuss the determinants of aggregate
demand, and distinguish between a
movement along the aggregate demand
curve and a shift of the curve.
3. Discuss the determinants of aggregate
supply, and distinguish between a
movement along the short-run aggregate
supply curve and a shift of the curve.
Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia
Learning Objectives
4. Use the aggregate demand and aggregate

supply model to illustrate the difference
between short-run and long-run
macroeconomic equilibrium.
5. Use the dynamic aggregate demand and
aggregate supply model to analyse
macroeconomic conditions.
Business cycles impacts on Canon
Canon was able to

grow rapidly during the
economic boom
experienced in
Australia from the early
1990s to 2007.
 The economic
downturn in 2008-09
saw a fall in demand by
other businesses for
Canon’s products.
LEARNING OBJECTIVE 1
The Business Cycle

Business cycle: Alternating periods of
economic expansion and economic
recession.
 The expansion phase
 Production, employment and income are
increasing.
 The business cycle peak
 The recession phase
 Production, employment and income are
declining.
 The business cycle trough
The Business Cycle
 Recession: A significant decline in activity

spread across the economy, lasting more
than a few months, visible in production,
employment, real income and wholesale-
retail trade.
 Official definition of a recession: Two
successive quarters of negative economic
growth.
Movements in real GDP, Australia,
1980 – 2007: Figure 13.1
6
3
Per cent
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
-1
-2
-3
Source: Australian Bureau of Statistics (2008),
Australian National Accounts , Cat. No. 5206.0. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia
The Business Cycle

What happens during a business cycle?
 Each business cycle is different, however
all share some similarities.
 The end of an expansion is typically
associated with rising interest rates rising and
wages, and profits begin to fall.
 A recession often begins with decreased
spending by firms on capital goods, and/or
decreased spending by households on new
houses and consumer durables.
The Business Cycle

The effect of the business cycle on car
sales.
 Consumer durables are affected by the
business cycle more than non-durables.
 People postpone buying durables, particularly
expensive items such as new cars, during a
recession.
The effect of the business cycle on new car
sales, Australia, 1994 – 2007: Figure 13.2
65 000
60 000
55 000
Car sales
50 000
45 000
40 000
35 000
30 000
Source: Australian Bureau of Statistics (2007), Sales

of New Motor Vehicles, Australia , Cat. No. 9314.0. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia
The Business Cycle

The impact of a recession on the
inflation rate.
 During economic expansions the inflation rate
usually increases.
 Exception: If the expansion is due to rising
productivity levels and an expansion of potential
GDP.
 During recessions the inflation rate usually
decreases.
 Exception: The recession is caused by a supply
shock.
The impact of a recession on the inflation
rate, Australia: Figure 13.3
6
Per cent
Source: Reserve Bank of Australia (2007), Statistics: Consumer Price

Index, All Goods, viewed 29 April 2008 at <www.rba.gov.au/statistics>
The Business Cycle

The impact of a recession on the
unemployment rate.
 Recessions cause the unemployment rate to
increase.
 The rate of unemployment continues to rise
after the recession is over, because:
 Discouraged workers re-enter the labour force.
 Firms continue to operate below capacity after the
recession is over and may not re-hire workers for
some time.
The impact of a recession on the unemployment
rate, Australia: Figure 13.4
12
11
10
9
Per cent
4
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Labour Force: Electronic Delivery , Cat. No. 6203.0. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia
The Business Cycle

Recessions are partly due to business
cycles and partly due to economic
shocks.
 1974: Oil price shock – OPEC.
 1982/83: High real wages and inflation.
 1990: Government induced recession due
to high interest rates.
 2008/09: World financial crisis – credit
shortage.
Fluctuations in real GDP, Australia,
1960-2007: Figure 13.5
8
4
Per cent
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
-1
-2
-3
Australian National Accounts , Cat. No. 5206.0. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia
Aggregate Demand
 Aggregate demand and aggregate
supply model: A model that explains
short-run fluctuations in real GDP and the
price level.
 Real GDP and the price level are
determined in the short run by the
intersection of the aggregate demand curve
and the short-run aggregate supply curve.
Aggregate Demand
 Aggregate demand curve (AD): A
curve showing the relationship between the
price level and the quantity of real GDP
demanded by households, firms and the
government.
 Short-run aggregate supply curve:
(SRAS): A curve showing the relationship in
the short-run between the price level and
the quantity of real GDP supplied by firms.
Aggregate demand and aggregate
supply: Figure 13.6
Price level
Short-run
aggregate
supply,
SRAS
100
Aggregate
demand, AD
0
$1000 Real GDP (billions of
dollars)
Aggregate Demand
Why is the aggregate demand curve
downward sloping?
1. The wealth effect
 How a change in the price level affects
consumption.
2. The interest rate effect
 How a change in the price level affects
investment.
3. The international-trade effect
 How a change in the price level affects net
exports.
Aggregate Demand
Shifts in the aggregate demand curve
versus movements along it.
 The AD curve shows the relationship
between the price level and the quantity of
real GDP demanded, holding everything
else constant.
 Changes in the price level are depicted as
movements up or down a stationary
aggregate demand curve.
Aggregate Demand
The variables that shift the aggregate
demand curve:
1. Changes in government policies.
 Examples: taxes; government purchases.
2. Changes in the expectations of households

or firms.
3. Changes in foreign variables.
 Examples: exchange rates; relative income
levels between countries.
MAKING THE
13.1CONNECTION The effect of exchange
rates on sales
 During some years, the

falling value of the
Australian dollar
against the New
Zealand dollar reduced
prices of Australian
exports to New
Zealand.
Determinants of Aggregate Demand
 Explain whether each of the following will cause a

movement along or a shift of the Aggregate Demand
(AD) curve.
 In each case, specify which of the four components of
AD will be impacted, and explain how.
a) Rising interest rates cause a drop in consumer

optimism as households become concerned about
their ability to meet mortgage payments.
b) An increase in the price level decreases the value
of superannuation accounts held by Australian
households to fund their retirement.
c) The Australian dollar falls in value against the US
dollar and other major currencies.
 STEP 1: Review the material. This question is intended

to help differentiate between events that will cause a
change in aggregate quantity demanded, (a movement
along the aggregate demand curve), and a change in
aggregate demand (a shift in the AD curve). The
material is covered in the sections ‘Why is the aggregate
demand curve downward sloping?’, and ‘The variables
that shift the aggregate demand curve’.
 STEP 2: Answering (a): Households become

pessimistic about the future. In order to ensure they can
continue to meet higher mortgage payments caused by
rising interest rates, consumers spend less in the
present. The AD curve will shift inwards to the left.
 STEP 3: Answering (b): This is an example of a change
in the value of assets, or the wealth effect.
Superannuation accounts are one of the most important
assets for many Australians.
 An increase in the price level decreases the real value of
superannuation funds.

 Aggregate quantity demanded will decrease as
households spend less in order to contribute more to
their superannuation. This is reflected in an upward
movement along the AD curve.
 STEP 4: Answering (c): A fall in the value of the
Australian dollar means it costs less in terms of other
currencies to buy Australian dollars, and hence also
goods, services and investments denominated in
Australian dollars. Net exports should therefore
increase, and this will be reflected in an increase in
AD – a shift to the right of the AD curve.
Aggregate Supply
 The long-run aggregate supply curve
(LRAS): A curve showing the relationship in
the long run between the price level and the
quantity of real GDP supplied.
 The long-run aggregate supply curve
shows that in the long run, increases in the
price level do not affect the level of real
GDP.
 The long-run aggregate supply curve is a
vertical line at potential GDP.
Aggregate Supply
Shifts in the long-run aggregate supply
curve.
 The LRAS curve shifts because potential
real GDP increases over time.
 Increases in potential GDP (or economic
growth) are due to:
1. An increase in resources.
2. An increase in machinery and equipment.
3. New technology.
The long-run aggregate supply
curve: Figure 13.7
Price level
LRAS2006 LRAS2007 LRAS2008
112
100
95
0
$1100 $1140 $1170 Real GDP
(billions of dollars)
Aggregate Supply
The short-run aggregate supply curve.
 The SRAS is upward sloping, showing that
in the short-run firms will produce more in
response to higher prices.
 The prices of inputs tends to rise more
slowly than the prices of final products.
 Contracts make some wages and prices ‘sticky’.
 Firms are often slow to adjust wages.
 Menu costs make some prices sticky. Menu
costs are costs to firms of changing prices.
Aggregate Supply
Shifts in the short-run aggregate supply
curve versus movements along it.
 The SRAS curve shows the short-run
relationship between the price level and the
quantity of goods and services firms are willing
to supply, holding everything else constant.
 Changes in the price level are depicted as
movements up or down a stationary short-run
aggregate supply curve.
Aggregate Supply
Variables that shift the SRAS curve.
1. Expected changes in the future price level.

2. Adjustments of workers and firms to errors
in past expectations about the price level.
3. Unexpected changes in the price of an
important natural resource.
How expectations of the future price level affect
the short-run aggregate supply: Figure 13.8
Price level
1. If firms and workers
expect the price level to SRAS2010
be 3% higher in 2010
than in 2009 … SRAS2009
103 2. … the SRAS curve

will shift to the left to
100 reflect worker and firm
expectations of rising
costs.
0
dollars)
Aggregate Supply
Variables that shift the short-run and the
long-run aggregate supply curves.
1. Increases in the labour force and/or in

the capital stock, and/or in resources.
2. Technological change.
Macroeconomic equilibrium in
the long run and the short run
 In long-run equilibrium, the aggregate
demand and short-run aggregate supply
curves intersect at a point along the
long-run aggregate supply curve.
Long-run macroeconomic equilibrium:
Figure 13.9
Price level
LRAS
SRAS
100
AD
0
dollars)
Recessions, expansions and supply
shocks.
 The following analysis of the aggregate
demand and aggregate supply model begins
with a simplified case, using two
assumptions:
1. The price level is currently at 100, and workers
and firms expect it to remain at 100 in the future.
2. Potential GDP is at $1000 billion and will remain
at that level in the future.
Recession
1. The short-run effect of a decline in
aggregate demand.
 AD curve shifts left, and real GDP declines.
2. Adjustment back to potential GDP in the

long run.
 Automatic adjustment mechanism: SRAS
curve shifts right, (which may take several
years).
The short-run and long-run effects of a
decrease in aggregate demand: Figure 13.10
Price level
1. A decline in LRAS SRAS1
investment
shifts AD to SRAS2
the left causing
a recession.
2. As firms and workers

100 A adjust to the price level
being lower than
98 B expected, costs will fall,
and cause SRAS to shift
96 C to the right.
AD2 AD1
0
3. Equilibrium moves from point $980 1000 Real GDP (billions of
B back to potential GDP at dollars)
point C, with a lower price level. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia
Expansion
1. The short-run effect of an increase in
aggregate demand.
 AD curve shifts right, real GDP and the price
level rise.

long run.
 Automatic adjustment mechanism: SRAS
curve shifts left, (which may take a year or
more).
The short-run and long-run effects of an
increase in aggregate demand: Figure 13.11
Price level
1. An increase LRAS SRAS2
in investment
shifts AD to SRAS1
the right,
causing an
inflationary
expansion. 2. As firms and workers
C adjust to the price level
106 being higher than
expected, costs will rise,
103 B and cause SRAS to shift
to the left.
100 A
AD1 AD2
0
3. Equilibrium moves from point B $1000 1030 Real GDP (billions of
back to potential GDP at point C, dollars)
with a higher price level. Hubbard, Garnett, Lewis and O’Brien: Essentials of Economics © 2010 Pearson Australia
 Supply shock: An unexpected event that
causes the short-run aggregate supply
curve to shift.
 Stagflation: A combination of inflation and
recession, usually resulting from a supply
shock.
Supply shock
1. The short-run effect of a supply shock.
 SRAS curve shifts left, real GDP falls and the
price level rises.

long run.
 SRAS curve shifts right, (which may take
several years).
The short-run and long-run effects of a supply
shock: Figure 13.12
2. …moving short-run
equilibrium to point B,
with lower real GDP Price
Price and a higher price level
level level. LRAS SRAS2
SRAS2
LRAS
SRAS1 SRAS1
B B
104 104 2. Equilibrium
moves from
100 1. An increase in oil
A prices shifts SRAS 100 A point B
potential GDP
to the left … at the original
price level.
AD AD
0 Real GDP 0 Real GDP

$970 1000 $970 1000
(billions of (billions of
dollars) dollars)
(a) A recession with a rising price level – (b) Adjustment back to potential GDP –
the short-run effect of a supply shock. the long-run effect of a supply shock.
The short-run and long-run effects of a supply
shock: Figure 13.12 1. The recession caused by the
supply shock eventually leads to
2. …moving short-run falling wages and prices,
equilibrium to point B,
with lower real GDP Price shifting SRAS back to its
Price original position.
and a higher price level
level level. LRAS SRAS2
SRAS2
LRAS
SRAS1 SRAS1
B B
104 104 2. Equilibrium
moves from
100 1. An increase in oil
A prices shifts SRAS 100 A point B to
potential GDP
to the left … at the original
price level.
AD AD
0 Real GDP 0 Real GDP

$970 1000 $970 1000
(billions of (billions of
dollars) dollars)
(a) A recession with a rising price level – (b) Adjustment back to potential GDP –
the short-run effect of a supply shock. the long-run effect of a supply shock.
Using the Aggregate Demand Aggregate Supply model.
 Assume the economy is initially in equilibrium with

long-run aggregate supply (LRAS) constant. Now
suppose growing GDP in China and India leads to an
increase in demand and higher prices for Australian
resources. Explain both the initial change in
equilibrium and the longer term effect.
Using the Aggregate Demand Aggregate Supply

model.
 STEP 1: Review the chapter material. The basic

equilibrium model is explained in the section on
‘Macroeconomic equilibrium in the long run and in the
short run’.
 STEP 2: An increase in demand for Australian exports
will cause an increase in AD represented by a rightward
shift of the AD curve. Short-run equilibrium will move
beyond potential GDP, causing an increase in the price
level.
Using the Aggregate Demand Aggregate Supply model.
 The price level is now higher than workers and firms had
expected. As workers and firms adjust to the higher
price level, prices and wages rise, and the short-run
aggregate supply curve shifts inwards to the left.
 Equilibrium moves back to potential GDP, but at a higher
price level.
A dynamic aggregate demand and

aggregate supply model
 A dynamic aggregate demand and aggregate
supply model can be created by making three
changes to the basic model:
1. Potential real GDP increases continually, shifting
the long-run aggregate supply curve to the right.
2. During most years the aggregate demand curve
will be shifting to the right.
3. Except during periods when workers and firms
expect high rates of inflation, the short-run
aggregate supply curve will be shifting to the
right.
A dynamic aggregate demand and
aggregate supply model: Figure 13.13
Price level 2. During the course of a year,
increases in the labour force
1. The economy LRAS1 LRAS2 SRAS1 and capital stock as well as
technological change cause a
begins in shift from LRAS1 to LRAS2.
equilibrium at point
A with SRAS1 and SRAS2
AD1 intersecting at
a point on LRAS1. 3. The same factors that cause the
LRAS curve to shift during the year
A also cause the SRAS curve to shift.
100 B 4. During the course of
the year, rising income
and population,
5. The dynamic increasing investment,
AD-AS model and increasing
government purchases
allows us to give a cause the AD curve to
more accurate shift, and the economy
account of ends in a new
changes in real equilibrium at point B.
AD2
GDP and the price
level. AD1
0
$1000 1030 Real GDP (billions of
dollars)
Using dynamic aggregate demand and aggregate
supply to understand inflation: Figure 13.14
Price level
LRAS1 LRAS2
SRAS1
SRAS2
1. If AD shifts to
104 B the right more
than LRAS …
100 A
2. …the price
level rises.
AD2
AD1
0
$1000 1050 Real GDP (billions of
dollars)
MAKING THE
13.2CONNECTION Does rising productivity
growth reduce
employment?
 New technology
and equipment
increases labour
productivity.
An Inside Look
 JB Hi-Fi reports
sales up 36% and
net profit after tax
up 56%.
An Inside Look
Figure 1: Australian economic expansion between 2002 and
2007
Key Terms
 Aggregate demand and aggregate supply model
 Aggregate demand curve (AD)
 Business cycle
 Long-run aggregate supply curve (LRAS)
 Menu costs
 Short-run aggregate supply curve (SRAS)
 Stagflation
 Supply shock
Get Thinking!
At various times, the Australian dollar increases in value
against the US dollar and other major currencies. At the same
time, higher education continues as an important component
of Australia’s export revenue. The cost of education in
Australia therefore increases when the Australian dollar rises
relative to other currencies.
Discuss with your fellow students from other countries the role
the changing value of the Australian dollar played in their
decision to study in Australia.
Explain the impact that such changes have on the net export
component of aggregate demand, and hence aggregate
demand, ceteris paribus.
Check Your Knowledge
Q1. From a trough to a peak, the
economy goes through:
a. The recession phase of the business
cycle.
b. The expansion phase of the business
cycle.
c. A contraction.
d. A depression.
Q1. From a trough to a peak, the
economy goes through:
a. The recession phase of the business
cycle.
b. The expansion phase of the business
cycle.
c. A contraction.
d. A depression.
Q2. During the early stages of a recovery:

a. Firms usually rush to hire new
employees before other firms employ
them.
b. Firms are usually reluctant to hire new
employees.
c. The rate of unemployment surges
dramatically.
d. The rate of unemployment decreases
dramatically.
Q2. During the early stages of a recovery:

a. Firms usually rush to hire new
employees before other firms employ
them.
b. Firms are usually reluctant to hire new
employees.
c. The rate of unemployment surges
dramatically.
d. The rate of unemployment decreases
dramatically.
Q3. The aggregate demand curve shows the

relationship between the price level and
the quantity of real GDP demanded by:
a. Households.
b. Firms.
c. The government.
d. All of the above.
Q3. The aggregate demand curve shows the

relationship between the price level and
the quantity of real GDP demanded by:
a. Households.
b. Firms.
c. The government.
Q4. Which of the following factors do not

cause the aggregate demand curve to
shift?
a. A change in the price level.
b. A change in government policies.
c. A change in the expectations of households
and firms.
d. A change in foreign factors.
Q4. Which of the following factors do not

cause the aggregate demand curve to
shift?
a. A change in the price level.
b. A change in government policies.
c. A change in the expectations of households
and firms.
d. A change in foreign factors.
Q5. How can government policies shift the

aggregate demand curve to the right?
a. By increasing personal income taxes.
b. By increasing business taxes.
c. By increasing government purchases.
Q5. How can government policies shift the

aggregate demand curve to the right?
a. By increasing personal income taxes.
b. By increasing business taxes.
c. By increasing government purchases.
Q6. Which of the following statements is true?

a. In the long run, increases in the price level
result in an increase in real GDP.
b. In the long run, increases in the price level
result in a decrease in real GDP.
c. In the long run, increases in the price level result
in no change in real GDP.
d. In the long run, increases in the price level may
increase or decrease real GDP.
Q6. Which of the following statements is true?

a. In the long run, increases in the price level
result in an increase in real GDP.
b. In the long run, increases in the price level
result in a decrease in real GDP.
c. In the long run, increases in the price level result
in no change in real GDP.
d. In the long run, increases in the price level may
increase or decrease real GDP.
Q7. Which of the following would shift both the

short-run and the long-run aggregate
supply curves?
a. A higher expected future price level.
b. An increase in the current price level.
c. A technological advance.
Q7. Which of the following would shift both the

short-run and the long-run aggregate
supply curves?
a. A higher expected future price level.
b. An increase in the current price level.
c. A technological advance.
Q8. Which of the following is usually the cause

of stagflation?
a. Reductions in government spending.
b. Increases in investment.
c. Printing money to finance government
expenditures.
d. An adverse supply shock.
Q8. Which of the following is usually the cause

of stagflation?
a. Reductions in government spending.
b. Increases in investment.
c. Printing money to finance government
expenditures.
d. An adverse supply shock.
APPENDIX
The aggregate expenditure

model
 Aggregate Expenditure Model: A
macroeconomic model that focuses on the
relationship between total spending and real
GDP, assuming the price level is constant.
 The model is composed of a graph called the
45° line diagram to illustrate macroeconomic
equilibrium.
 Sometimes the model is also known as the
Keynesian cross diagram.
An example of a 45° line diagram:
Figure 13A.1
APPENDIX

model
 Aggregate Expenditure (AE): The total
amount of spending in the economy: the
sum of consumption (C), planned
investment (I), government purchases (G),
and net exports (NX).
AE = C + I + G + NX
APPENDIX
Graphing macroeconomic
equilibrium
Using the 45° line diagram to illustrate
macroeconomic equilibrium.
 The 45° line measures real national income
against planned real aggregate expenditure.
 All points of macroeconomic equilibrium must
lie along the 45° line.
 At points above the 45° line, aggregate
expenditures are greater than GDP.
 At points below the 45° degree line,
aggregate expenditures are less than GDP.
The relationship between planned aggregate
expenditure and GDP on a 45° line diagram:
Figure 13A.2
Hubbard, Garnett, Lewis and O’Brien: Essentials

of Economics © 2010 Pearson Australia
APPENDIX

model
 Consumption function: The relationship
between consumption spending and disposable
income.
 The consumption function intersects the vertical
axis on the 45° diagram at a point above zero due
to autonomous consumption.
 Autonomous consumption: Consumption
that is independent of income.
 Induced consumption: Consumption that
is determined by the level of income.
Macroeconomic equilibrium on the 45°
line diagram: Figure 13A.3

APPENDIX

model
 The AE line intersects the 45° line at
equilibrium real GDP.
 At points above the 45° line, planned aggregate
expenditures are greater than GDP, inventories
will fall, leading to an increase in production.
 At points below the 45° degree line, planned
aggregate expenditures are less than GDP,
firms will experience an unplanned increase in
inventories, leading to a decrease in production.
Macroeconomic equilibrium : Figure 13A.4

APPENDIX

model
Showing a recession on the 45° line
diagram
 Macroeconomic equilibrium can occur at any
point on the 45° line.
 Ideal to have equilibrium occur at potential
real GDP.
 If there is insufficient aggregate spending,
equilibrium will occur below potential real
GDP: the economy will be in a recession.
Showing a recession on the 45° line: Figure
13A.5

QA1. The idea of the aggregate expenditure

model is that, in any particular year, the
level of gross domestic product (GDP) is
determined mainly by:
a. The economy’s endowment of economic
resources and technology.
b. The level of interest rate for the economy as a
whole.
c. The level of aggregate expenditures.
d. The level of government expenditures.
QA1. The idea of the aggregate expenditure

model is that, in any particular year, the
level of gross domestic product (GDP) is
determined mainly by:
a. The economy’s endowment of economic
resources and technology.
b. The level of interest rate for the economy as a
whole.
c. The level of aggregate expenditures.
d. The level of government expenditures.
QA2. Which of the following statements is

correct?
a. Actual investment and planned investment are
always the same.
b. Actual investment will equal planned
investment only when inventories rise.
c. Actual investment will equal planned
investment only when there is no unplanned
change in inventories.
d. Actual investment and planned investment
only when inventories decline.
QA2. Which of the following statements is

correct?
a. Actual investment and planned investment are
always the same.
b. Actual investment will equal planned
investment only when inventories rise.
c. Actual investment will equal planned
investment only when there is no unplanned
change in inventories.
d. Actual investment and planned investment
only when inventories decline.

Aggregate Demand and Aggregate Supply Analysis: Powerpoint

Uploaded by

Copyright:

Available Formats

Aggregate Demand and Aggregate Supply Analysis: Powerpoint

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Aggregate Demand and Aggregate Supply Analysis: Powerpoint

Uploaded by

Copyright:

Available Formats

PowerPoint

4. Use the aggregate demand and aggregate

Canon was able to

The Business Cycle

The Business Cycle

 Recession: A significant decline in activity

The Business Cycle

The Business Cycle

Source: Australian Bureau of Statistics (2007), Sales

The Business Cycle

Source: Reserve Bank of Australia (2007), Statistics: Consumer Price

The Business Cycle

The Business Cycle

2. Changes in the expectations of households

 During some years, the

Determinants of Aggregate Demand

 Explain whether each of the following will cause a

Determinants of Aggregate Demand

a) Rising interest rates cause a drop in consumer

Determinants of Aggregate Demand

 STEP 1: Review the material. This question is intended

Determinants of Aggregate Demand

 STEP 2: Answering (a): Households become

Determinants of Aggregate Demand

1. Expected changes in the future price level.

103 2. … the SRAS curve

1. Increases in the labour force and/or in

2. Adjustment back to potential GDP in the

2. As firms and workers

2. Adjustment back to potential GDP in the

2. Adjustment back to potential GDP in the

0 Real GDP 0 Real GDP

0 Real GDP 0 Real GDP

Using the Aggregate Demand Aggregate Supply model.

 Assume the economy is initially in equilibrium with

Using the Aggregate Demand Aggregate Supply

 STEP 1: Review the chapter material. The basic

Using the Aggregate Demand Aggregate Supply model.

A dynamic aggregate demand and

Q2. During the early stages of a recovery:

Q2. During the early stages of a recovery:

Q3. The aggregate demand curve shows the

Q3. The aggregate demand curve shows the

Q4. Which of the following factors do not

Q4. Which of the following factors do not

Q5. How can government policies shift the

Q5. How can government policies shift the

Q6. Which of the following statements is true?

Q6. Which of the following statements is true?

Q7. Which of the following would shift both the

Q7. Which of the following would shift both the

Q8. Which of the following is usually the cause

Q8. Which of the following is usually the cause

The aggregate expenditure

The aggregate expenditure

Hubbard, Garnett, Lewis and O’Brien: Essentials

The aggregate expenditure

Hubbard, Garnett, Lewis and O’Brien: Essentials

The aggregate expenditure