Unit 3: Aggregate Demand and Supply and Fiscal Policy

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Unit 3Aggregate Demand and Supply and Fiscal
Policy
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2
Shifters of Aggregate Demand
AD C I G X
Change in Consumer Spending
Change in Government Spending
Change in Investment Spending
Net EXport Spending
Shifters of Aggregate Supply
AS I R A P
Change in Inflationary Expectations
Change in Resource Prices
Change in Actions of the Government
Change in Productivity (Investment)
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Practice
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4
Answer and identify shifter C.I.G.X or
R.A.P
B
A
D
A
D
B
A
A
C
A major increase in productivity.
A
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Putting AD and AS together to getEquilibrium
Price Level and Output
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Inflationary and Recessionary Gaps
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Example Assume the government increases
spending. What happens to PL and Output?
LRAS
Price Level
AS
PL and Q will Increase
PL1
PLe
AD1
AD
QY
Q1
GDPR
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Inflationary Gap
Output is high and unemployment is less than NRU
LRAS
Price Level
AS
Actual GDP above potential GDP
PL1
AD1
QY
Q1
GDPR
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Example Assume the price of oil increases
drastically. What happens to PL and Output?
LRAS
Price Level
AS1
AS
PL1
Stagflation Stagnate Economy Inflation
PLe
AD
QY
Q1
GDPR
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Recessionary Gap
Output low and unemployment is more than NRU
LRAS
Price Level
AS1
Actual GDP below potential GDP
PL1
AD
QY
Q1
GDPR
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AD and AS Practice Worksheet
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How does this cartoon relate to Aggregate Demand?
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Draw AD and AS at full employment
LRAS
AS
Price Level
P2
P1
AD2
ADCIGX
Qf (Yor FE)
Q2
GDPR
Output Increases
PL Increases
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Short Run and Long Run
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Shifts in AD or AS change the price level and
output in the short run
LRAS
Price Level
AS
PLe
AD
QY
GDPR
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Example Assume consumers increase spending. What
happens to PL and Output?
LRAS
Price Level
AS
PL1
PLe
AD1
AD
QY
Q1
GDPR
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Now, what will happen in the LONG RUN?
Inflation means workers seek higher wages and
production costs increase
LRAS
Price Level
AS1
AS
PL2
Back to full employment with higher price level
PL1
PLe
AD1
AD
QY
Q1
GDPR
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Example Consumer expectations fall and consumer
spending plummets. What happens to PL and Output
in the Short Run and Long Run?
Price Level
LRAS
AS
AS1
AS increases as workers accept lower wages and
production costs fall
PLe
PL1
PL2
AD
AD
AD1
QY
Q1
GDPR
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