1、12 SHORT-RUN ECONOMIC FLUCTUATIONSCopyright 2004 South-WesternAggregate Demand and Aggregate SupplyCopyright 2004 South-WesternShort-Run Economic Fluctuations Economic activity fluctuates from year to year. In most years production of goods and services rises. On average over the past 50 years, prod
2、uction in the U.S. economy has grown by about 3 percent per year. In some years normal growth does not occur, causing a recession. Copyright 2004 South-WesternShort-Run Economic Fluctuations A recession is a period of declining real incomes, and rising unemployment. A depression is a severe recessio
3、n.Copyright 2004 South-WesternTHREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS Economic fluctuations are irregular and unpredictable. Fluctuations in the economy are often called the business cycle.Figure 1 A Look At Short-Run Economic FluctuationsBillions of1996 DollarsReal GDP(a) Real GDP$10,0009,0008,
4、0007,0006,0005,0004,0003,0002,00019651970197519801985199019952000Copyright 2004 South-WesternCopyright 2004 South-WesternTHREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS Most macroeconomic variables fluctuate together. Most macroeconomic variables that measure some type of income or production fluctuate
5、closely together. Although many macroeconomic variables fluctuate together, they fluctuate by different amounts.Figure 1 A Look At Short-Run Economic FluctuationsBillions of1996 Dollars(b) Investment Spending$1,8001,6001,4001,2001,00080060040020019651970197519801985199019952000Investment spendingCop
6、yright 2004 South-WesternCopyright 2004 South-WesternTHREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS As output falls, unemployment rises. Changes in real GDP are inversely related to changes in the unemployment rate. During times of recession, unemployment rises substantially.Figure 1 A Look At Short-Ru
7、n Economic FluctuationsPercent ofLabor Force(c) Unemployment Rate02468101219651970197519801985199019952000Unemployment rateCopyright 2004 South-WesternCopyright 2004 South-WesternEXPLAINING SHORT-RUN ECONOMIC FLUCTUATIONS How the Short Run Differs from the Long Run Most economists believe that class
8、ical theory describes the world in the long run but not in the short run. Changes in the money supply affect nominal variables but not real variables in the long run. The assumption of monetary neutrality is not appropriate when studying year-to-year changes in the economy.Copyright 2004 South-Weste
9、rnThe Basic Model of Economic Fluctuations Two variables are used to develop a model to analyze the short-run fluctuations. The economys output of goods and services measured by real GDP. The overall price level measured by the CPI or the GDP deflator.Copyright 2004 South-WesternThe Basic Model of E
10、conomic Fluctuations The Basic Model of Aggregate Demand and Aggregate Supply Economist use the model of aggregate demand and aggregate supply to explain short-run fluctuations in economic activity around its long-run trend.Copyright 2004 South-WesternThe Basic Model of Economic Fluctuations The Bas
11、ic Model of Aggregate Demand and Aggregate Supply The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level. The aggregate-supply curve shows the quantity of goods and services that firms choose to produce and sell
12、at each price level.Figure 2 Aggregate Demand and Aggregate Supply.Quantity ofOutputPriceLevel0AggregatesupplyAggregatedemandEquilibriumoutputEquilibriumprice levelCopyright 2004 South-WesternCopyright 2004 South-WesternTHE AGGREGATE-DEMAND CURVE The four components of GDP (Y) contribute to the aggr
13、egate demand for goods and services.Y = C + I + G + NXFigure 3 The Aggregate-Demand Curve.Quantity ofOutputPriceLevel0AggregatedemandPYY2P21. A decreasein the pricelevel . . .2. . . . increases the quantity ofgoods and services demanded.Copyright 2004 South-WesternCopyright 2004 South-WesternWhy the
14、 Aggregate-Demand Curve Is Downward Sloping The Price Level and Consumption: The Wealth Effect The Price Level and Investment: The Interest Rate Effect The Price Level and Net Exports: The Exchange-Rate EffectCopyright 2004 South-WesternWhy the Aggregate-Demand Curve Is Downward Sloping The Price Le
15、vel and Consumption: The Wealth Effect A decrease in the price level makes consumers feel more wealthy, which in turn encourages them to spend more. This increase in consumer spending means larger quantities of goods and services demanded.Copyright 2004 South-WesternWhy the Aggregate-Demand Curve Is
16、 Downward Sloping The Price Level and Investment: The Interest Rate Effect A lower price level reduces the interest rate, which encourages greater spending on investment goods. This increase in investment spending means a larger quantity of goods and services demanded.Copyright 2004 South-WesternWhy
17、 the Aggregate-Demand Curve Is Downward Sloping The Price Level and Net Exports: The Exchange-Rate Effect When a fall in the U.S. price level causes U.S. interest rates to fall, the real exchange rate depreciates, which stimulates U.S. net exports. The increase in net export spending means a larger
18、quantity of goods and services demanded.Copyright 2004 South-WesternWhy the Aggregate-Demand Curve Might Shift The downward slope of the aggregate demand curve shows that a fall in the price level raises the overall quantity of goods and services demanded. Many other factors, however, affect the qua
19、ntity of goods and services demanded at any given price level. When one of these other factors changes, the aggregate demand curve shifts.Copyright 2004 South-WesternWhy the Aggregate-Demand Curve Might Shift Shifts arising from Consumption Investment Government Purchases Net ExportsCopyright 2004 S
20、outh-WesternShifts in the Aggregate Demand CurveQuantity ofOutputPriceLevel0Aggregatedemand, D1P1Y1D2Y2 Copyright 2004 South-WesternTHE AGGREGATE-SUPPLY CURVE In the long run, the aggregate-supply curve is vertical. In the short run, the aggregate-supply curve is upward sloping.Copyright 2004 South-
21、WesternTHE AGGREGATE-SUPPLY CURVE The Long-Run Aggregate-Supply Curve In the long run, an economys production of goods and services depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services. The p
22、rice level does not affect these variables in the long run.Figure 4 The Long-Run Aggregate-Supply CurveQuantity ofOutputNatural rateof outputPriceLevel0Long-runaggregatesupplyP21. A changein the pricelevel . . .2. . . . does not affect the quantity of goods and services supplied in the long run.PCop
23、yright 2004 South-WesternCopyright 2004 South-WesternTHE AGGREGATE-SUPPLY CURVE The Long-Run Aggregate-Supply Curve The long-run aggregate-supply curve is vertical at the natural rate of output. This level of production is also referred to as potential output or full-employment output.Copyright 2004
24、 South-WesternWhy the Long-Run Aggregate-Supply Curve Might Shift Any change in the economy that alters the natural rate of output shifts the long-run aggregate-supply curve. The shifts may be categorized according to the various factors in the classical model that affect output.Copyright 2004 South
25、-WesternWhy the Long-Run Aggregate-Supply Curve Might Shift Shifts arising Labor Capital Natural Resources Technological KnowledgeFigure 5 Long-Run Growth and InflationQuantity ofOutputY1980AD1980AD1990Aggregate Demand, AD2000PriceLevel0Long-runaggregatesupply,LRAS1980Y1990LRAS1990Y2000LRAS2000P1980
26、1. In the long run,technological progress shifts long-run aggregate supply . . .4. . . . andongoing inflation.3. . . . leading to growthin output . . .P1990P20002. . . . and growth in the money supply shifts aggregate demand . . .Copyright 2004 South-WesternCopyright 2004 South-WesternA New Way to D
27、epict Long-Run Growth and Inflation Short-run fluctuations in output and price level should be viewed as deviations from the continuing long-run trends.Copyright 2004 South-WesternWhy the Aggregate-Supply Curve Slopes Upward in the Short Run In the short run, an increase in the overall level of pric
28、es in the economy tends to raise the quantity of goods and services supplied. A decrease in the level of prices tends to reduce the quantity of goods and services supplied.Figure 6 The Short-Run Aggregate-Supply CurveQuantity ofOutputPriceLevel0Short-runaggregatesupply1. A decreasein the pricelevel
29、. . .2. . . . reduces the quantityof goods and servicessupplied in the short run.YPY2P2Copyright 2004 South-WesternCopyright 2004 South-WesternWhy the Aggregate-Supply Curve Slopes Upward in the Short Run The Misperceptions Theory The Sticky-Wage Theory The Sticky-Price TheoryCopyright 2004 South-We
30、sternWhy the Aggregate-Supply Curve Slopes Upward in the Short Run The Misperceptions Theory Changes in the overall price level temporarily mislead suppliers about what is happening in the markets in which they sell their output: A lower price level causes misperceptions about relative prices. These
31、 misperceptions induce suppliers to decrease the quantity of goods and services supplied.Copyright 2004 South-WesternWhy the Aggregate-Supply Curve Slopes Upward in the Short Run The Sticky-Wage Theory Nominal wages are slow to adjust, or are “sticky” in the short run: Wages do not adjust immediatel
32、y to a fall in the price level. A lower price level makes employment and production less profitable. This induces firms to reduce the quantity of goods and services supplied.Copyright 2004 South-WesternThe Sticky-Price Theory Prices of some goods and services adjust sluggishly in response to changin
33、g economic conditions: An unexpected fall in the price level leaves some firms with higher-than-desired prices. This depresses sales, which induces firms to reduce the quantity of goods and services they produce.Copyright 2004 South-WesternWhy the Short-Run Aggregate-Supply Curve Might Shift Shifts
34、arising Labor Capital Natural Resources. Technology. Expected Price Level.Copyright 2004 South-WesternWhy the Aggregate Supply Curve Might Shift An increase in the expected price level reduces the quantity of goods and services supplied and shifts the short-run aggregate supply curve to the left. A
35、decrease in the expected price level raises the quantity of goods and services supplied and shifts the short-run aggregate supply curve to the right.Figure 7 The Long-Run EquilibriumNatural rateof outputQuantity ofOutputPriceLevel0Short-runaggregatesupplyLong-runaggregatesupplyAggregatedemandAEquili
36、briumpriceCopyright 2004 South-WesternFigure 8 A Contraction in Aggregate DemandQuantity ofOutputPriceLevel0Short-run aggregatesupply, ASLong-runaggregatesupplyAggregatedemand, ADAPYAD2AS21. A decrease inaggregate demand . . .2. . . . causes output to fall in the short run . . .3. . . . but over tim
37、e, the short-runaggregate-supplycurve shifts . . .4. . . . and output returnsto its natural rate.CP3BP2Y2Copyright 2004 South-WesternCopyright 2004 South-WesternTWO CAUSES OF ECONOMIC FLUCTUATIONS Shifts in Aggregate Demand In the short run, shifts in aggregate demand cause fluctuations in the econo
38、mys output of goods and services. In the long run, shifts in aggregate demand affect the overall price level but do not affect output.Copyright 2004 South-WesternTWO CAUSES OF ECONOMIC FLUCTUATIONS An Adverse Shift in Aggregate Supply A decrease in one of the determinants of aggregate supply shifts
39、the curve to the left: Output falls below the natural rate of employment. Unemployment rises. The price level rises.Figure 10 An Adverse Shift in Aggregate SupplyQuantity ofOutputPriceLevel0Aggregate demand3. . . . and the price level to rise.2. . . . causes output to fall . . .1. An adverse shift i
40、n the short-run aggregate-supply curve . . .Short-runaggregatesupply, ASLong-runaggregatesupplyYAPAS2BY2P2Copyright 2004 South-WesternCopyright 2004 South-WesternThe Effects of a Shift in Aggregate Supply Stagflation Adverse shifts in aggregate supply cause stagflationa period of recession and infla
41、tion. Output falls and prices rise. Policymakers who can influence aggregate demand cannot offset both of these adverse effects simultaneously.Copyright 2004 South-WesternThe Effects of a Shift in Aggregate Supply Policy Responses to Recession Policymakers may respond to a recession in one of the fo
42、llowing ways: Do nothing and wait for prices and wages to adjust. Take action to increase aggregate demand by using monetary and fiscal policy.Figure 11 Accommodating an Adverse Shift in Aggregate SupplyQuantity ofOutputNatural rateof outputPriceLevel0Short-runaggregatesupply, ASLong-runaggregatesup
43、plyAggregate demand, ADP2APAS23. . . . whichcauses theprice level to rise further . . .4. . . . but keeps outputat its natural rate.2. . . . policymakers canaccommodate the shiftby expanding aggregatedemand . . .1. When short-run aggregatesupply falls . . .AD2CP3Copyright 2004 South-WesternCopyright
44、 2004 South-WesternSummary All societies experience short-run economic fluctuations around long-run trends. These fluctuations are irregular and largely unpredictable. When recessions occur, real GDP and other measures of income, spending, and production fall, and unemployment rises.Copyright 2004 S
45、outh-WesternSummary Economists analyze short-run economic fluctuations using the aggregate demand and aggregate supply model. According to the model of aggregate demand and aggregate supply, the output of goods and services and the overall level of prices adjust to balance aggregate demand and aggre
46、gate supply.Copyright 2004 South-WesternSummary The aggregate-demand curve slopes downward for three reasons: a wealth effect, an interest rate effect, and an exchange rate effect. Any event or policy that changes consumption, investment, government purchases, or net exports at a given price level w
47、ill shift the aggregate-demand curve.Copyright 2004 South-WesternSummary In the long run, the aggregate supply curve is vertical. The short-run, the aggregate supply curve is upward sloping. The are three theories explaining the upward slope of short-run aggregate supply: the misperceptions theory,
48、the sticky-wage theory, and the sticky-price theory.Copyright 2004 South-WesternSummary Events that alter the economys ability to produce output will shift the short-run aggregate-supply curve. Also, the position of the short-run aggregate-supply curve depends on the expected price level. One possible cause of economic fluctuations is a shift in aggregate demand.Copyright 2004 South-WesternSummary A second possible cause of economic fluctuations is a shift in aggregate supply. Stagflation is a period of falling output and rising prices.
