Economic Fluctuations and Aggregate Demand

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Economic Fluctuations and Aggregate Demand
ECO 105 Lecture 4.3 20 April 2007
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Short-Run Macroeconomic Modeling

• Well develop an aggregate demand-aggregate
  supply model.
• AD is based on
• AS is based on the

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Aggregate Demand

• Y
• Y is real GDP, so
• I.e., measured in

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The Aggregate Demand Curve
Price Level
AD looks like an ordinary demand curve but
AD
Y
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AD Curve (1)

• Whats in the ceteris paribus clause?
• Whats held constant?
• Desire to
• Investment
• Government
• Tax
• Money

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AD Curve (2)

• Yd falls as PI rises but not because of the
• The wealth effect
• The interest-rate effect
• The exchange-rate effect
• All combine to produce a

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Shifting the AD Curve

• Americans save more
• Businesses invest more
• An increase in income-tax rates reduces
  consumption spending
• The Fed increases the money supply . . .
• Foreign economies expand . . .

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The Expenditures Multiplier

• When I, G, or NX rises,
• Consumption depends on disposable income
• Thus, when a change in exogenous spending causes
  Y to increase,
• Ultimately, ?Y

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How big is the expenditures multiplier?

• Like the money multiplier, in theory it could be
• In reality, several factors constrain the
  multiplier to
• So, e.g., ?Y

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Bonus Quiz Time!!!