Section 4 Explaining the Economy s Movements in the Short Run Part A Overview of AD and AS Q What is this stuff all about Overview of AD and AS P and Y P price level average prices in the entire economy Measure with the GDP deflator Sect 1 CPI moves similarly Y Real GDP o o o Q GDP measures how many of the following Production Spending Income GDP by Income Q Let s look at one economic transaction you buy 10 of fresh corn from a farmer at a roadside stand Consider The value of the produced corn The income the farm receives The dollars you spend How many of these are equal to each other in value Scaled up to the entire economy we can measure GDP by production income or spending and get the same value Real GDP GDP deflator Q Given the above chart which way did the economy move on the graph on the lower right during the Great Recession A up and to the left B up and right C down and left D down and right Overview of AD and AS Q From one year to the next in an expansion which way would the economy move on this same graph A up and to the right B up and left C down and right D down and left GDP deflator P Real GDP Y Overview of AD and AS Plotting 13 and 14 Growth Y 2 5 Inflation P 1 5 2014 2013 15 7 16 1 Y A bigger gain in Y B smaller gain in Y C bigger gain in P D smaller gain in P An Overview of AF and AS Head to P 108 3 106 7 P 108 3 106 7 Q To reduce the unemployment rate what would we like to see here 15 7 16 1 Y The movements in the curves explain growth Y increase and inflation P increase AD total spending C I G NX SRAS total production from all firms Equilibrium where spending production In an expansion both curves slowly shift right End of Part A Overview of AD and AS Q What is this stuff all about A How monetary and fiscal policy and other things change AD and SRAS and then change P and Y That is what causes expansions recessions slow growth and now inflation Part B Aggregate Demand AD Q When total spending in the economy grows more workers have jobs What causes total spending to rise Keep Okun s law in mind Aggregate Demand AD Def Aggregate demand AD is all spending in an economy for different values of the price level P Components I investment 1 C consumption 2 3 G government purchases 4 NX net exports exports imports AD C I G NX As disposable income C Wealth effect as wealth C Ex 08 household wealth 18 11 tr Ex Why Fed funds rate is 0 Population more people C As interest C 1 Consumption C 67 of GDP Def household disposable income income taxes transfer payments Q If both transfer payments and interest rates C would A might or 2 Graphing AD the role of the price level P All prices and nominal wages change P real wealth C AD P US export costs NX AD P loan demand rates AD Q Are these the same reasons in micro for a downward sloping demand curve A No AD C I G NX Q The Fed cuts interest rates For the same P there would be spending and the AD curve A more shifts right B more shifts left C more move up along the curve D less down along the curve Ceteris paribus change one factor and look at impact Q If wealth increased and taxes fell C would A increase 3 Investment I 15 of GDP Q Interest rates and taxes affected households as part of consumption Do you think that increases in them would affect I in the same way i e I rise or fall A Yes As interest I As taxes on investment I And more firms I 4 Government Purchases G 19 of GDP Independent of taxes T Broader concept federal expenditures G transfers interest payments on federal debt Q How many of the following will shift the AD curve right interest rates demand curve shifts left population G T demand curve shifts left P moves along the curve Net Exports NX 3 of GDP Exports imports Ex U S exports 2 1 trillion 14 Imports 2 7 trillion 17 Ex 5 62014 1 39 bought 1 4 9 2015 1 06 bought 1 If foreign income rises NX The dollar s value vs foreign currencies not P Q From 2014 to 2015 the U S value compared to the euro and it was for Air France to buy a U S made Boeing jet lost easier lost harder A B C gained easier D gained harder the dollar appreciates NX the dollar depreciates NX Q How many of the following will shift the AD curve right U S depreciates relative to the Foreign income Transfer payments Wealth firms T Aggregate Demand AD Shift Summary AD C I G NX Each of the following shifts AD right Fiscal policy o G T via C and I transfers via C Monetary Policy o Interest rates on C and I Others Population via C o Wealth via C o o Number of firms via I o o Value of dollar NX Foreign incomes via NX Are others but we ll just use these End of Part B Aggregate Demand AD Q When total spending in the economy grows more workers have jobs What causes total spending to rise Part C Short Run Aggregate Supply SRAS Q OK increasing total spending i e more AD can increase real GDP and thus reduce unemployment But are there limits to the possible increases in real GDP Short Run Aggregate Supply SRAS Q What do you think would happen if AD grew more than the economy could produce A P rise B P constant C P fall Def The short run aggregate supply curve SRAS shows how much the economy can produce at different values of the price level P For one business Southwest Airlines costs are different from output price In general the price firms sell their final goods for their output all firms P is more flexible than the cost of their inputs Wages and some other costs are sticky Q When P in the short run costs rise than P profits and production less rise falls A B more fall rises C D more rise rises E less rise rises less fall falls In Summary P Y and SRAS is vertical P Y and SRAS is horizontal P Y and SRAS is upward sloped P Y and SRAS is upward sloped with aggregate supply Y is output production with AD it is spending spending production in equilibrium future topic Short Run Aggregate Supply SRAS Shifts Q Say K or L or technological change measured by TFP A happened SRAS and we keep P constant Q If costs to business for the …