Post on 03-Jan-2016
transcript
Chapter 8
Modelling Real GDP and the Price Level in the Short Run
8.1 The Short-Run Aggregate Supply
• The aggregate supply curve (SRAS) shows the relationship between the aggregate price level and the quantity of aggregate output.
Aggregate Supply Curve• Aggregate Supply is the amount of real GDP
that will be made available by sellers at various price levels.
• Aggregate Supply looks different in the Long Run and the Short Run:– In the Long Run, classical economists assume the
economy operates at full employment (maximum output), independent of the price level.
– In the Short Run, businesses will increase supply if the price level increases.
Positive Relationship
• There is a positive relationship in the short run between price level and the quantity of aggregate output supplied.
• Positive Slope because of Pricesa) ALL Prices increase > suppliers costs in wages
are sticky so real wages fall
b) So suppliers hire more workers and produce more
c) Real GDP increases
P2
Rea
l Wag
e
Number Employed
a) Labour MarketPF1
D1
LRAS1
Real GDP/ Year
b) c) Real GDP
Pric
e Le
vel
The Short-Run Aggregate Supply Curve
SRAS1S1
P1
Y1 Y2
Y1
Y2
L1 L2
W2
W1
The SAS is positively sloped because:• Eg. Chocolate bar $2, workers paid $5, real
wage is $3• Now,
1. prices go up to $3 and so real wage goes down to $2
2. Producers sell Chocolate bar for more money ($3) therefore make more profit so they hire more workers and expand production
• Production Beyond LRAS? a) Can push current workers to produce more, or
call up laid-off workers
b) Machines worked more hours
c) Hired more workers
P2
PF1
LRAS1
Real GDP/ Year
c) Real GDP
Pric
e Le
vel
The Short-Run Aggregate Supply Curve
SRAS1
P1
Y1 Y2
The SAS is positively sloped because:• Eg. Chocolate bar $2, workers paid $5, real
wage is $3• Now,
1. prices go down to $1.50 and so real wage goes up to $3.50
2. Producers sell Chocolate bar for less money ($1.50) therefore make less profit so they hire less workers and produce less
• Production Beyond LRAS?
a) Can lay-off workers
b) Machines worked less hours
P1
PF1
LRAS1
Real GDP/ Year
c) Real GDP
Pric
e Le
vel
The Short-Run Aggregate Supply Curve
SRAS1
P2
Y1Y2
• Remember Diminishing Returns?a) Very Steep slope beyond Y1
-workers get tired if overworked
-more workers get in the way of production
PF1
LRAS1
Real GDP/ Year
c) Real GDP
Pric
e Le
vel
The Shape of the Short-Run Aggregate Supply Curve
SRAS1
P1
Y1 Y2
Movement Vs. Shift
• Movements are caused by change in Aggregate Price Levels
• Shift in SRAS is caused by:
8.2 Shift in the SRAS
• Changes in: – Input prices eg. Lettuce, tomato, dressing – nominal wages, and – productivity
• lead to changes in producers’ profits and shift the short-run aggregate supply curve
• Result of change in producers’ DESIRE to supply not ABILITY to supply
The SRAS shifts upward (decrease in SRAS)
Real output
Pri
ce
lev
el
SRAS0
SRAS11. Increases in input prices Eg. wages
3. Increases in sales and excise taxes
2. Expectations of higher future inflation
4. Decreases in productivity
5. Increase in import prices
8.3 Equilibrium
P2
LRAS1
Pric
e Le
vel
SRAS1
P1
Y1 Y2
• SR equilibrium occurs at intersection of AD and SRAS
• At P2 there is an excess of goods in the market so prices fall
• Demand/Supply shock: any economic event that causes a shift in demand/supply
• A) Inflationary Gap – output > natural GDP• B) Recessionary Gap – output < natural GDP
AD1
a
b
AD Shifts While AS is Stable
P2
LRAS1
Pric
e Le
vel
SRAS1
P1
Y1
• Demand/Supply shock: any economic event that causes a shift in demand/supply
B) Shift to left is a Recessionary Gap – SR output (Y2) < natural GDP (Y1)
AD2
AD1
Y2
AD Shifts While AS is Stable
P2
LRAS1
Pric
e Le
vel
SRAS1
P1
Y1
• Demand/Supply shock: any economic event that causes a shift in demand/supply
B) Shift to right is a Inflationary Gap – SR output (Y2) > natural GDP (Y1)
AD2
AD1
Y2
8.4 The Long-Run Adjustment Process
• Demand/Supply shock: any economic event that causes a shift in demand/supply causing a inflationary or recessionary gap
• At “a” the economy is at full employment/production (6 salads)
• At “b” firms are operating at beyond natural production rates • There is excess demand for inputs (that go into producing goods eg
lettuce) and prices for inputs rise• Higher input prices shift the SRAS to left from “b” to “a” again
P1
LRAS1
Pric
e Le
vel
SRAS1
P2
Y1
AD1
Y2
SRAS2
ab
The Long-Run Adjustment Process
• Demand/Supply shock: any economic event that causes a shift in demand/supply causing a inflationary or recessionary gap
• At “a” the economy is at full employment/production (6 salads)
• At “b” firms are operating at below natural production rates • There is surplus inputs in the market (that go into producing goods eg
lettuce) and prices for inputs fall• Lower input prices shift the SRAS to right from “b” back to “a” again
P2
LRAS1
Pric
e Le
vel
SRAS2
P1
Y1
AD1
Y2
SRAS1
ba
8.5 AD and AS in an Open Economy
• How does a stronger CAD affect aggregate supply? CAD buy 3 USD, or 1:3
-if CAD stronger compared to other currencies: CAD now buy 4 USDa) The US lettuce is cheaper for producers to import (input prices lower) b) AS shift outward, Agg. P lowers, UN down c) Cheaper imports (lower M) mean lower NX = (X-M) and AD lowers and shifts to left AD = C + I + G + (X-M) 5 = 1 + 2 + 2 4 = 1 + 2 + 1
CAD Increases
P2
LRAS1
Pric
e Le
vel
SRAS1
P1
Y1
AD2
AD1
Y2
ab
c
SRAS2
Y3
P3
b
AD and AS in an Open Economy
• How does a weaker CAD affect aggregate supply? CAD buy 4 USD or 4:1
-if CAD stronger compared to other currencies: CAD now buy 3 USD, or 3:1a) The US lettuce is expensive for producers to import (input prices higher) b) AS shift inwards , Agg. P increases, UN upc) More expensive imports (M goes down) mean higher NX = (X-M) and AD increases and shifts to rightAD = C + I + G + (X-M) 5 = 1 + 2 + 2 6 = 1 + 2 + 3
CAD Weakens
P2
LRAS1
Pric
e Le
vel
SRAS2
P1
Y2
AD1
AD2
Y1
c
a
SRAS1
Y3
P3
8.6 Inflation in the Short-Run
• Demand-pull inflation: increases in AD not matched by increases in AS• WWI, government spending on making weapons, labour
• Cost-Push inflation: decreases in AS not matched by decreases in AD
P2
LRAS1
Pric
e Le
vel
SRAS1
P1
Y1
AD2
AD1
Y2
Demand-Pull Inflation Cost-Push Inflation
bP2
LRAS1
Pric
e Le
vel
SRAS2
Y2
AD1
Y1
a
SRAS1
P1