Aggregate Demand (AD):
Is the relationship between
the general price level and
total spending in the
economy.
Aggregate demand can be expressed in two
ways:
- Aggregate Demand Schedule
- Aggregate Demand Curve
Increase in Aggregate Demand:
An increase in total expenditures at all price levels
Decrease Aggregate Demand:
decrease in total expenditures at all price levels.
Wealth effect:
With changes in the price level, the real value of the households’
financial assets changes, causing households to adjust spending.
Foreign Trade Effect:
changes in price level means expenditures on imports change in
the same direction while expenditures on exports change in the
opposite direction.
Consumer spending is decided when households determine how much to
spend or save.
Changes in consumer spending also change expenditure which, causes a
shift in the aggregate demand curve.
Disposable income (DI):
Most significant determinant of consumer spending. Total DI may
change as result of population change in changes in DI per household.
Direct relationship between DI and consumer spending so when DI rises the
consumer spending rises.
Wealth:
Made up of financial an real assets. Real assets (houses and
appliances) financial assets (stocks and bonds).
•Example: Stock increase/decrease
Consumer Expectation:
Influence the demand for a single product. (example War/
flood…..spend more save less)
Interest Rates:
Households often borrow to purchase durable goods. If interest
rate falls consumers more likely to borrow (increase in AD). If
jump in interest rate the opposites happens and spending falls
(decrease in AD)
Investment represents spending on projects where earning a profit is
anticipated. The investment component of AD is limited to planned
investment.
- Interest Rates: rise = fall in AD fall= increase in AD
- Business Expectation: profit increase/decrease
Rise in Government purchases (i.e highway
construction ) increase AD and a fall causes a
decrease in AD.
Net exports can vary due to changes in the price level.
Foreign Incomes:
The Rising of falling of income on foreign countries will impact the
exports of Canadian good to other countries increasing or
decreasing the AD. ( i.e Rise of income in France)
Exchange rates:
the change in exchange rates effects the net exports. If the Can.
dollar goes up the net exports fall or vice versa.
Graph the Following:
Aggregate Demand Schedule for
2002 Real GDP
Price Level
Aggregate demand
$Billions (real GDP)
200
650
160
700
120
750
Aggregate Demand
Shift the Aggregate Demand Curve
based on a $50 Billion increase
Identify the impact of each of the following trends on
the aggregate supply. In each case where there is a
shift, explain which component(s) of aggregate
demand cause the shift:
a.The federal government cuts taxes for low-income
households.
b.There is a slump in share prices on Canadian stock
markets.
c.The price level in Canada rises.
d.Canadian interest rates fall
e.The Canadian dollar rises in value against the U.S.
Aggregate Supply (AS):
The relationship between
the general price level and
real output produced in
the economy
Or
The total supply of all
goods and services
produced in a society.
Aggregate demand can be expressed in two
ways:
- Aggregate Supply Schedule
- Aggregate Supply Curve
The Aggregate supply curve displays the
total amount of good and services that would
be supplied at each price level. As measured
by the Chain Fisher volume index, in an
economy
The AS curve features some important differences from the supply
curve you are familiar with in microeconomics…
-The very elastic portion that occurs at the low
output levels.
- At very low output most of society’s resources are
sitting idle.
amounts of
- As more output is produced, more competition
occurs among producers for limited
land, labour and capital inputs.
- At higher output levels, the prices tend to rise
much more rapidly.
Aggregate Supply Factors:
variables that change total output at all price levels.
Input Prices:
Aggregate Supply assumes steady input prices for the
businesses that are producing the output. When a rise in the price of an
input pushes up the production cost, businesses reduce their real output
and aggregate supply curve shifts to the left. Also works in the other
direction with pushing cost down.
Resource Supplies:
Over the long tern, supplies of resources in an economyespecially human and capital resources – tend to grow. With any such
increase businesses produce more real output at every price level. More
inputs over the long run increase aggregate supply.
Productivity:
Is the real output produced per unit of output over a given
period of time. Labour Productivity is the quantity of
output produced per worker in a certain period of time. A
technological increases the real output. Likewise a
technological decline reduces the real output.
Government policies:
Can influence AS through their effects on the business
environment in an economy. Example: taxes rise for
businesses and households, because after-tax returns on
supplying economic resources are pushed down businesses
and households may reduce the resources they supply
causing a fall in real outputs.
Graph the Following:
Aggregate Supply Schedule for
2002 Real GDP
Price Level
Aggregated Supply Aggregate Supply
$billions (real GDP)
120
650
160
700
200
725
240
730
Shift the aggregate supply curve based
on a $50 billion increase.
Identify the impact of each of the following trends on the aggregate
supply. In each case , specify whether the change in aggregate
supply is a short run or a long run change:
a. The federal government introduces tough new environmental
regulations on Canadian business.
b.The price of electricity increases.
c. wages for Canadian workers are reduced
d.Global warming causes a rise in ocean levels, effecting Canadian
costal areas
e.Due to decline in immigration, the size of the Canadian Labour
force declines.