Graphing Macroeconomic Problems

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Graphing MacroeconomicProblems
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Full Employment (F.E.) There is between 5 and
5.5 unemployment in the economyThere is 0
cyclical unemployment
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P AS
AD CIGNX ?
F.E. RGDP
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There are 3 macroeconomic ProblemsI. The
Recessionary Gap- caused by a leftward shift in
the AD curve (AD is too low)
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AD shifts leftward when either C, I, G, or NX
decreaseex Consumer confidence falls causing
C to fall
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P AS AD
CIGNX AD RGDPC
F.E. RGDP Rec. GAP
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Three things to note from the Recessionary
Gap1. RGDP is lower than it would be at
F.E.2. Unemployment is higher than it would be
at F.E.
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3. The average price level is lower than normal
(inflation is not a problem)
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II. The Inflationary Gap - caused by a
rightward shift in the AD curve (AD is too high)
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AD shifts rightward when either C, I, G, or NX
increaseex The government increases military
expenditures causing G to increase
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P AS AD
AD CIGNX
F.E. RGDPC RGDP Infl. GAP
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Three things to note from the Inflationary
Gap1. RGDP is higher than it would be at
F.E.2. Unemployment is lower than it would be
at F.E.
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3. The average price level is higher than at F.E.
(Inflation is getting out of control)
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III. Stagflation- caused by a leftward shift in
the AS curve
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AS shifts leftward when the cost of production
increasesex the price of oil, a major input
increases
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P AS AS
ADCIGNX RGDPC
F.E. RGDP
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Three things to note from Stagflation1. RGDP
is lower than it would be at F.E.2.
Unemployment is higher than it would be at F.E.
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3. The average price level is higher than at F.E.
(Inflation is getting out of control)
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During the Oil Crisis of the late 1970s and
early 1980s both the inflation rate and the
unemployment rate exceeded 10Misery Index The
inflation rate the unemployment rate
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If the AS curve shifts to the right, no problem
is created.RGDP increases, while neither
unemployment nor inflation increase.F.E.
increases due to economic growth
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P AS AS
ADCIGNX F.E. F.E.
RGDP
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If the government takes no action, the economy
will naturally, over time, return to F.E. (the
long run equilibrium point in the economy)
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If the economy is experiencing high unemployment
(rec. gap or stagflation) then there is a surplus
of workers on the market
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This surplus causes the price of workers (real
wages) to fallThat is, workers salaries dont
keep up with inflation
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Lower wages reduce the cost of production which
in turn shifts the AS curve rightward bringing
the economy back to F.E.
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P AS AS
AD CIGNX AD RGDPC
F.E. RGDP Rec. GAP
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If the economy is experiencing a shortage of
workers (Inflationary Gap) then real wages will
be bid upwards
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This causes the cost of production to increase
and the AS curve to shift leftward bringing the
economy back to F.E.
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P AS AS
AD AD CIGNX
F.E. RGDPC RGDP Infl.
GAP