Spending and Total Expenditures
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Transcript of Spending and Total Expenditures
Slide 10-1
Spending and Total Expenditures
Aggregate Demand
– The total of all planned expenditures in the economy
Aggregate Supply
– The total of all planned production in the economy
Slide 10-2
Spending and Total Expenditures
Questions
– What determines the total amount that individuals, governments, firms, and foreigners want to spend?
– What determines the equilibrium price level?
Slide 10-3
The Aggregate Demand Curve
Aggregate Demand Curve
– A curve showing planned purchase rates for all goods and services in the economy at various price levels, all other things held constant
Aggregate demand = C + I + G + X
Slide 10-4
The Aggregate Demand Curve
Real GDP per Year($ trillions)
Pric
e Le
vel
8 90
120
AD
100
140
6 7 11 1210
A
As the price levelrises, real GDPdemand declines
Slide 10-5
The Aggregate Demand Curve
Real GDP per Year($ trillions)
Pric
e Le
vel
8 90
120
AD
A100
140
6 7 11 1210
B
Slide 10-6
The Aggregate Demand Curve
Real GDP per Year($ trillions)
Pric
e Le
vel
8 90
120
AD
A100
140
6 7 11 1210
B
C
Figure 10-4
Slide 10-7
The Aggregate Demand Curve
What happens when the price level rises?
– The Real-Balance Effect (wealth effect)
– The Interest Rate Effect
– The Open Economy Effect
Slide 10-8
The Aggregate Demand Curve
The Real-Balance Effect
– The change in the real value of money balances when the price level changes
Slide 10-9
The Aggregate Demand Curve
The Interest Rate Effect
– Higher price levels indirectly increase the interest rate.
Slide 10-10
The Aggregate Demand Curve
The Open Economy Effect
– Higher price levels result in foreigners’ desiring to buy fewer American-made goods while Americans desire more foreign-made goods (i.e., net exports fall).
Slide 10-11
Aggregate Demand versus Demand for a Single Good
When the aggregate demand curve is derived, we are looking at the entire circular flow of income and product.
When a demand curve is derived, we are looking at a single product in one market only.
Slide 10-12
Shifts in the Aggregate Demand Curve
Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right.
Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.
Slide 10-13
Shifts in the Aggregate Demand Curve
Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right.
Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.
Slide 10-14
Factors Increasing Aggregate Demand
A drop in the foreign exchange value of the dollar
Increased security about jobs and future income
Improvements in economic conditions in other countries
A reduction in real interest rates (nominal interest rates corrected for inflation) not due to price level changes
Tax decreases
An increase in the amount of money in circulation
Slide 10-15
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Slide 10-16
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Slide 10-17
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD1AD
Increase in aggregate demand
Slide 10-18
Factors Decreasing Aggregate Demand
A rise in the foreign exchange value of the dollar
Decreased security about jobs and future income
Declines in economic conditions in other countries
A rise in real interest rates (nominal interest rates corrected for inflation) not due to price level changes
Tax increases
A decrease in the amount of money in circulation
Slide 10-19
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Slide 10-20
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Slide 10-21
Shifts in the Aggregate Demand Curve
Real GDP per Year($ trillions)
GD
P D
efla
tor
3 40
120
1 2 6 75
90
AD
Decrease in aggregate demand
AD1
Slide 10-22
The Aggregate Supply Curve
The Long-Run Aggregate Supply Curve
– Real output at full employment
– A vertical line representing real output based on full information and after full adjustment has occurred
Slide 10-23
Long-Run Equilibrium and the Price Level
Figure 10-5
Slide 10-24
Long-Run Equilibrium and the Price Level
Long-run equilibrium occurs at the intersection of the LRAS curve and the AD curve
– Equilibrium price level is determined
– Planned real expenditures for the economy are equal to total planned production along the economy’s trends growth path
Slide 10-25
The Effects of Economic Growth on the Price Level
Figure 10-6, Panel (a)
Slide 10-26
The Effects of Economic Growth on the Price Level
Figure 10-6, Panel (b)
Slide 10-27
The Effects of Economic Growth on the Price Level
Secular Deflation– An increase in LRAS will, ceteris paribus,
result in a decrease in the price level.
Avoiding Secular Deflation– If the AD curve shifts outward by the same
amount as the LRAS curve,the price level remains constant.
– The AD curve can be shifted outward by increasing the money supply.
Slide 10-28
Inflation Rates in the United States
Figure 10-7Source: Economic Report of the President;
Economic Indicators, various issues
Slide 10-29
Causes of Inflation:Supply-Side Inflation
Figure 10-8, Panel (a)
• When LRAS1 shifts to LRAS2, the price level rises from 120 to 140
• Inflation is caused by a decrease in LRAS.
Slide 10-30
Causes of Inflation:Demand-Side Inflation
Figure 10-8, Panel (b)
An increase in AD from AD1 to AD2 causes the price level to rise from 120 to 140. An increase in AD causes inflation.
Slide 10-31
Causes of Inflation:Economic Growth and Inflation
Figure 10-9Source: Economic Report of the President;
Economic Indicators, various issues