ECON 209 Lecture Notes - Lecture 8: Potential Output, Aggregate Demand, Aggregate Supply
7 Jun 2018
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2018_01_31 ECON 209
Lecture 8: Chapter 23 continued (Output and Prices in the Short Run)
I. Aggregate demand generated with aggregate
expenditure
II. Shift aggregate demand and supply accordingly
23.1 The Demand Side of the Economy
I. Exogenous Changes in the Price Level
A. Consider the model presented so far
B. What happens when price level changes for
an exogenous reasons?
C. Study how a change in price level affects
desired aggregate expenditure
II. Increase in prices will affect consumption
A. Purchasing power of savings goes down
III. Exogenous changes in price level
A. An increase in P reduces private-sector
wealth
1. Purchasing power of the wealth decreases (not the wages)
a) Need to be saving more
2. Reduction in desired consumption
3. Downward shift in AE curve
B. There is also an effect on net exports:
1. Increase in prices in Canada
a) Net exports will decrease
b) The exports we typically sell abroad become less attractive
2. Goods abroad more attractive than our own (increase)
3. The NX function shifts downward
4. Further downward shift in AE curve
IV. Increase in prices, AE will move down (consumption will
move down)
A. Equilibrium Y falls
V. Have enough information to derive the aggregate demand
VI. The Aggregate Demand Curve
A. Aggregate demand (AD) curve relates equilibrium
real GDP to the price level
1. Prices in the vertical axis
B. For any given P, the AD curve shows the level of real
GDP - For which desired aggregate expenditure
equals actual GDP
C. Changes in the price level cause movements along
the AD curve
VII. Derivation of the AD curve
A. Consider a rise in the price level from P0
to P2
B. The AE curve shifts down, but we move
along the AD curve
VIII. The aggregate demand curve (AD) is
negatively sloped for 2 reasons
A. A fall in price level leads to a rise in
private sector wealth
1. Increases desired consumption
2. Leads to an increase in
equilibrium GDP
B. A fall in price level (for a given exchange
rate)
1. Leads to a rise in net exports
2. Leads to an increase in
equilibrium GDP
IX. The Simple Multiplier and Shifts in the AD curve
A. Shifts in the AD curve (aggregate demand
shocks)
B. Anything other than the price changing
C. Any shock that increases equilibrium GDP at a
given price level shifts the AD curve to the right
D. The horizontal shift of the AD curve is the
simple multiplier times the change in
autonomous spending
X. The Aggregate Demand Curve
A. For any given P, the AD curve shows the level
of real GDP for which desired aggregate
expenditure equals actual GDP
B. It says nothing about whether producers would
want to produce that income
1. Only that if it is produced, purchasers
will be willing to buy it
23.2 The Supply Side of the Economy
I. The Aggregate Supply Curve
A. The AS curve relates the price level to the quantity of output that the firms would like to
produce and sell
B. The AS curve is drawn for a given:
1. Level of technology
2. Set of factor prices
C. As unit costs rise with output
1. Firms will produce more output only if prices
increase
2. AS curve is upward sloping
II. The slope of AS curve is increasing as output rises
A. Positive relationship between prices and output firms would
like to sell
B. When output is low
1. Firms typically have excess capacity
a) Increase production without changing the prices much
2. Costs do not rise quickly
3. Assume aggregate supply is quite flat
C. When output is nearer to Y* (cost to potential output)
1. Increasing output becomes more costly
2. Costs rise as output rises
a) More costly to increase production
3. Firms need higher prices
4. Aggregate supply is very steep
D. Changes in prices - move along the AS curve
III. Shifts in Aggregate Supply Curve
A. Aggregate Supply Shocks
B. Anything that increases firm’s costs cases the AS curve to shift up
1. Factor prices
2. Technology
a) When a new technology appears, moves AS to the right
Document Summary
Lecture 8: chapter 23 continued (output and prices in the short run) Exogenous changes in the price level: consider the model presented so far, what happens when price level changes for. Vi. an exogenous reasons: study how a change in price level affects desired aggregate expenditure. Increase in prices will affect consumption: purchasing power of savings goes down. Exogenous changes in price level: an increase in p reduces private-sector wealth, need to be saving more, reduction in desired consumption, downward shift in ae curve, there is also an effect on net exports: Increase in prices, ae will move down (consumption will move down: equilibrium y falls. Have enough information to derive the aggregate demand. The aggregate demand curve: aggregate demand (ad) curve relates equilibrium real gdp to the price level, prices in the vertical axis, for any given p, the ad curve shows the level of real.
