Lecture 23Outline of Last Lecture I. Aggregate SupplyA. Aggregate Supply GraphII. Aggregate DemandA. Aggregate Demand GraphIII. Aggregate Equilibrium IV. Shifts in the Aggregate Supply Outline of Current Lecture I. Aggregate Supply ShiftsII. Aggregate Demand ShiftsIII. Reasons that the Demand ShiftsA. Definition of Recessionary GapB. Definition of Inflationary GapIV. Sticky PricesCurrent LectureThis lecture will continue on and finish up chapter 11 on aggregate supply and aggregate demand. It is important to note that the potential GDP line drawn on a graph can also be called the long run aggregate supply. The aggregate supply curve can also be called the short run aggregate supply. When the short run aggregate supply shifts to the right, the long run aggregate supply will also shift to the right. This causes the price of goods to decrease. The real GDP will increase. There will also be a shift in the equilibrium point. Now we will switch over to looking at what happens when the aggregate demand curve shifts. These shifts can be caused by changes in consumer consumption or business investments. An example of what this looks like is below. AGEC 217 1nd EditionAD2 LRAS SRAS AD1Price Level E1 E2Real GDPAs can be seen in the above graph, prices will rise. There will also be a higher output. The aggregate demand shifts to the right. The aggregate demand curve moves closer to the LRAS, which does not shift. If the aggregate demand function had shifted to the left, the opposite would happen. This can be caused by consumer consumption decreasing. The prices will also decrease. There will be more unemployment as well. This can be due to something like the stock market dropping. Next we will move onto chapter 12. This looks at the changes in aggregate demand in more detail. First we need to define some terms. A recessionary gap is when the aggregate demand shifts left and the output is less than the potential GDP. An inflationary gap is when aggregate demand shifts right and output is greater than the potential GDP. The question is why does the aggregate demand fluctuate so much? One cause is changes in consumer consumption. This includes disposable income, such as income-taxes. Another is changes in wealth or credit. Finally, consumer expectations can also change. Business investments also play a role in these fluctuations. There can be changes based upon expected profits and interest rates, or the cost of borrowing. Government spending also plays a role, based upon budgets and politics. The net exports are the final thing that can cause fluctuation. An increase in net exports, or specifically an increase in exports for a given import, can cause this. It is also based upon exchange rates andgrowth rates for trading partners. What makes a recession fit the Keynesian model? Firstly, the aggregate demand needs to shift left. It also needs to get stuck at the new equilibrium. Sticky wages and sticky prices will cause
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