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Percent change from 4 quarters 8 earlier
6 4 2 0 -2 -4 1960 1965 1970 1975 1980 1985 1990 1995 2000
slide 2
10
Average growth rate = 3.5%
CHAPTER 9
Introduction to Economic Fluctuations
relationship between the price level and the quantity of output demanded.
For this chapter’s intro to the AD/AS model,
we use a simple theory of aggregate demand based on the Quantity Theory of Money.
the short run.
For now (and throughout Chapters 9-12),
we assume that all prices are stuck at a predetermined level in the short run…
…and that firms are willing to sell as much
Time horizons
Long run:
Prices are flexible, respond to changes in supply or demand many prices are “sticky” at some predetermined level
The economy behaves much differently when prices are sticky.
slide 13
Long-run effects of an increase in M
P
LRAS
An increase in M shifts the AD curve to the right.
In the long run, this increases the price level…
P2
other factors, like exogenous changes in C or I.
CHAPTER 9
Introduction to Economic Fluctuations
slide 5
The model of aggregate demand and supply
the paradigm that most mainstream
CHAPTER 9
Introduction to Economic Fluctuations
slide 11
Aggregate Supply in the Long Run
Recall from chapter 3:
In the long run, output is determined by factor supplies and technology
slide 12
The long-run aggregate supply curve
P
LRAS
The LRAS curve is vertical at the full-employment level of output.
Y
CHAPTER 9
Y
Introduction to Economic Fluctuations
Y
CHAPTER 9
Introduction to Economic Fluctuations
slide 10
Aggregate Supply in the Long Run
Recall from chapter 3:
In the long run, output is determined by factor supplies and technology
as their customers are willing to buy at that price level. (SRAS) curve is horizontal:
Therefore, the short-run aggregate supply
CHAPTER 9
Introduction to Economic Fluctuations
demand can be used to analyze short-run and long-run effects of “shocks”
CHAPTER 9
Introduction to Economic Fluctuations
slide 1
Real GDP Growth in the United States
From Chapter 4, recall the quantity equation MV = PY
and the money demand function it implies: (M/P )d = k Y where V = 1/k = velocity.
For given values of M and V, these
P
SRAS
Y
CHAPTER 9
Introduction to Economic Fluctuations
slide 16
Short-run effects of an increase in M
In the short run when prices are sticky,…
P
…an increase in aggregate demand…
Chapters 10-12 develop the theory of
aggregate demand in more detail.
CHAPTER 9
Introduction to Economic Fluctuations
slide 7
The Quantity Equation as Agg. Demand
P
SRAS AD2 AD1 Y1 Y2
…causes output to rise.
CHAPTER 9
Y
Introduction to Economic Fluctuations
P1
AD2
AD1
…but leaves output the same.
CHAPTER 9
Y
Y
Introduction to Economic Fluctuations
slide 14
Aggregate Supply in the Short Run
In the real world, many prices are sticky in
Complete price flexibility is a crucial assumption, so classical theory applies in the long run.
CHAPTER 9
Introduction to Economic Fluctuations
slide 4
Y F (K , L )
Full-employment output does not depend
on the price level,
so the long run aggregate supply (LRAS) curve is vertical:
CHAPTER 9
Introduction to Economic Fluctuations
P
AD
Y
CHAPTER 9
Introduction to Economic Fluctuations
slide 9
Shifting the AD curve
P
An increase in the money supply shifts the AD curve to the right.
AD2 AD1
shows how the economy’s behavior is
different in the short run and long run
CHAPTER 9
Introduction to Economic Fluctuations
slide 6
Aggregate demand
The aggregate demand curve shows the
Chapter objectives
difference between short run & long run
introduction to aggregate demaቤተ መጻሕፍቲ ባይዱd
aggregate supply in the short run & long
run
see how model of aggregate supply and
slide 15
The short run aggregate supply curve
P
The SRAS curve is horizontal: The price level is fixed at a predetermined level, and firms sell as much as buyers demand.
Short run:
CHAPTER 9
Introduction to Economic Fluctuations
slide 3
In Classical Macroeconomic Theory,
(what we studied in chapters 3-8)
Output is determined by the supply side: – supplies of capital, labor – technology Changes in demand for goods & services (C, I, G ) only affect prices, not quantities.
equations imply an inverse relationship between P and Y:
CHAPTER 9
Introduction to Economic Fluctuations
slide 8
The downward-sloping AD curve
An increase in the price level causes a fall in real money balances (M/P ), causing a decrease in the demand for goods & services.
economists & policymakers use to think about economic fluctuations and policies to stabilize the economy
shows how the price level and aggregate
output are determined
Y F (K , L )
Y
is the full-employment or natural level of output, the level of output at which the economy’s resources are fully employed.
“Full employment” means that unemployment equals its natural rate.
CHAPTER NINE
macro
Introduction to Economic Fluctuations
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides by Ron Cronovich
© 2002 Worth Publishers, all rights reserved
When prices are sticky
…output and employment also depend on demand for goods & services, which is affected by fiscal policy (G and T )
monetary policy (M )
6 4 2 0 -2 -4 1960 1965 1970 1975 1980 1985 1990 1995 2000
slide 2
10
Average growth rate = 3.5%
CHAPTER 9
Introduction to Economic Fluctuations
relationship between the price level and the quantity of output demanded.
For this chapter’s intro to the AD/AS model,
we use a simple theory of aggregate demand based on the Quantity Theory of Money.
the short run.
For now (and throughout Chapters 9-12),
we assume that all prices are stuck at a predetermined level in the short run…
…and that firms are willing to sell as much
Time horizons
Long run:
Prices are flexible, respond to changes in supply or demand many prices are “sticky” at some predetermined level
The economy behaves much differently when prices are sticky.
slide 13
Long-run effects of an increase in M
P
LRAS
An increase in M shifts the AD curve to the right.
In the long run, this increases the price level…
P2
other factors, like exogenous changes in C or I.
CHAPTER 9
Introduction to Economic Fluctuations
slide 5
The model of aggregate demand and supply
the paradigm that most mainstream
CHAPTER 9
Introduction to Economic Fluctuations
slide 11
Aggregate Supply in the Long Run
Recall from chapter 3:
In the long run, output is determined by factor supplies and technology
slide 12
The long-run aggregate supply curve
P
LRAS
The LRAS curve is vertical at the full-employment level of output.
Y
CHAPTER 9
Y
Introduction to Economic Fluctuations
Y
CHAPTER 9
Introduction to Economic Fluctuations
slide 10
Aggregate Supply in the Long Run
Recall from chapter 3:
In the long run, output is determined by factor supplies and technology
as their customers are willing to buy at that price level. (SRAS) curve is horizontal:
Therefore, the short-run aggregate supply
CHAPTER 9
Introduction to Economic Fluctuations
demand can be used to analyze short-run and long-run effects of “shocks”
CHAPTER 9
Introduction to Economic Fluctuations
slide 1
Real GDP Growth in the United States
From Chapter 4, recall the quantity equation MV = PY
and the money demand function it implies: (M/P )d = k Y where V = 1/k = velocity.
For given values of M and V, these
P
SRAS
Y
CHAPTER 9
Introduction to Economic Fluctuations
slide 16
Short-run effects of an increase in M
In the short run when prices are sticky,…
P
…an increase in aggregate demand…
Chapters 10-12 develop the theory of
aggregate demand in more detail.
CHAPTER 9
Introduction to Economic Fluctuations
slide 7
The Quantity Equation as Agg. Demand
P
SRAS AD2 AD1 Y1 Y2
…causes output to rise.
CHAPTER 9
Y
Introduction to Economic Fluctuations
P1
AD2
AD1
…but leaves output the same.
CHAPTER 9
Y
Y
Introduction to Economic Fluctuations
slide 14
Aggregate Supply in the Short Run
In the real world, many prices are sticky in
Complete price flexibility is a crucial assumption, so classical theory applies in the long run.
CHAPTER 9
Introduction to Economic Fluctuations
slide 4
Y F (K , L )
Full-employment output does not depend
on the price level,
so the long run aggregate supply (LRAS) curve is vertical:
CHAPTER 9
Introduction to Economic Fluctuations
P
AD
Y
CHAPTER 9
Introduction to Economic Fluctuations
slide 9
Shifting the AD curve
P
An increase in the money supply shifts the AD curve to the right.
AD2 AD1
shows how the economy’s behavior is
different in the short run and long run
CHAPTER 9
Introduction to Economic Fluctuations
slide 6
Aggregate demand
The aggregate demand curve shows the
Chapter objectives
difference between short run & long run
introduction to aggregate demaቤተ መጻሕፍቲ ባይዱd
aggregate supply in the short run & long
run
see how model of aggregate supply and
slide 15
The short run aggregate supply curve
P
The SRAS curve is horizontal: The price level is fixed at a predetermined level, and firms sell as much as buyers demand.
Short run:
CHAPTER 9
Introduction to Economic Fluctuations
slide 3
In Classical Macroeconomic Theory,
(what we studied in chapters 3-8)
Output is determined by the supply side: – supplies of capital, labor – technology Changes in demand for goods & services (C, I, G ) only affect prices, not quantities.
equations imply an inverse relationship between P and Y:
CHAPTER 9
Introduction to Economic Fluctuations
slide 8
The downward-sloping AD curve
An increase in the price level causes a fall in real money balances (M/P ), causing a decrease in the demand for goods & services.
economists & policymakers use to think about economic fluctuations and policies to stabilize the economy
shows how the price level and aggregate
output are determined
Y F (K , L )
Y
is the full-employment or natural level of output, the level of output at which the economy’s resources are fully employed.
“Full employment” means that unemployment equals its natural rate.
CHAPTER NINE
macro
Introduction to Economic Fluctuations
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint® Slides by Ron Cronovich
© 2002 Worth Publishers, all rights reserved
When prices are sticky
…output and employment also depend on demand for goods & services, which is affected by fiscal policy (G and T )
monetary policy (M )