2. 2
Index
• Long run and short run fluctuations
• Demand curve in the short run
• Supply curve in the short run
• Two causes of economis fluctuations
3. 3
Index
• Long run and short run fluctuations
• Demand curve in the short run
• Supply curve in the short run
• Two causes of economis fluctuations
4. 4
The realty of short-run fluctuations
in USA
In the short run,real and nominal variables are highly interwined,and
changes in the money supply can temporarily push real GDP away from its
long-run trend.
(a)Real GDP
(b)investment spending
(c)Unemployment rate
6. 6
Three key facts about economic
fluctuations
• Fact1:Economic fluctuations are irregular and
unpredictable
• Fact2:Most macroeconmic quantities fluctuate
together
• Fact3:As output falls,unemployment rises
7. 7
The most important macro economic
variables in the long run
Chap 25
Chap 26
Chap 27
Chap 28
Chap 29
Chap 30
the level and growth of productivity and real GDP
How the financial system works and
How the real interest rate adjusts to balance
saving and investment
Why there is always some unemployment
in the economy
the monetary system and how changes inthe money
supply affect the price level,the inflation rate, and
the nominal interest rate
Chap 31
Chap 32
extention of this analysis to open economies to explain
the trade balance and the exchange rate.
GDP
financial
system
Unemployment
Monetary
system
Open
Economy
Chapter
Key words
Contens
8. 8
The classical dichotomy
and monetary neutrality
The Classical dichomomy
Monetary neutrality
・the separation of variables into real variables and nominal variables
・Changes in the money supply affect nominal variables but not real
variables.
MacroEconomic Theory
in the long-run
(Chap25-32)
9. 9
Index
• Long run and short run fluctuations
• Demand curve in the short run
• Supply curve in the short run
• Two causes of economis fluctuations
10. 10
The model of aggregate demand
and aggregate supply
quantity of output
quantity of output
quantity of output
Price
level
Price
level
Price
level
model of market demand and supply
in microeconomics
model of aggregate demand and suppy
in the long-run
model of aggregate demand and suppy
in the short-run
11. 11
Why the aggregate-demand curve
slopes down
quantity of output
Price
level
• The price level and consumption:The wealth effect
– Consumers are wealthier,which stimulates the demand for consumption goods.
• The price level and investment:The interest rate effect
– Interest rates fall,the demand for investment goods.
• The price level and net exports:The exchange rate effect
– The currency depreciates,which stimulates the demand for net exports.
Y=C+I+G+NX
12. 12
Why aggregate demand curve might shift
• Shifts arising from changes in
demand factor
more
less
consumption
a cut tax
a stock market booom
a tax hike
a stock market decline
investment
optimism about future
a fall in interest rate
pessimism about future
a rise in interest rate
government purchases
greater spending on defense or
highway construction
a cutback in defense or high way
spending
net exports
a boom overseas
speculation that causes an exchange-
rate depriciation
a recession overseas
speculation that causes an
exchange-rate appreciation
quantity of output
Price
level
Y=C+I+G+NX
13. 13
Index
• Long run and short run fluctuations
• Demand curve in the short run
• Supply curve in the short run
• Two causes of economis fluctuations
14. 14
Why the aggregate-supply curve
is verticalin the long run
quantity of output
Price
level
P1
P2
1. A change in the
price level...
2 does not affect the
quantitiy of goods and
services supplied in the
long run.
Natural rate
of output
In the long run, an economy's production of goods and
services(its real GDP) 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.
15. 15
Why the long run
aggregate supply curve might shift
• Shifts arising from changes in
Supply factor
more
less
Labor
increasing workers
decreasing workes
Capital
increse in the economy's capital
stock
decrese in the economy's capital
stock
Natural resources
The discovery of new mineral
A change in the availability of
resources
Technological knowledge
The invention of computers
opening up international trade
new regulations preventing firms
from using some production
methods
quantity of output
Price
level
Natural rate
of output
16. 16
Using aggregate demand and aggregate supply
to depict long run growth and inflation
Price level
Quantity of output
Y2000
Y2010
Y1990
P1990
P2000
P2010
1. In the long
run,technological
progress shifts long-run
aggregate supply
2. and growth in the
money supply shifts
aggregate demand.
2. and growth in the
money supply shifts
aggregate demand.
4. and ongoing inflation
17. 17
Why does the short run aggregate supply curve
slopes upward?
quantity of output
Price
level
The sticky wage
theory
The sticky price
theory
The misperception
theory
An unexpectedly low price raises the real wage,which causes
firms to hire fewer workers and produce a smaller quantity of
goods ans services.
An unexpectedly low price level leaves some firms with higher
than desired prices,which depress their sales and leads them to
cut back production.
An unexpectedly low price level leads some suppliers to think
their relative prices have fallen,which induces a fall in production.
18. 18
Mathematical expression of Supply
Quantity
of output
supplied
Natural
rate of
output
Actual
price
level
Expected
price
level
=
+
a
-
a number that determines how much output
responds to unexpected changes in the price level.
Output deviates in the short run from its long run level(the
natural rate) when the actual price level that people had
expected to prevail.
19. 19
Why the short run
aggregate supply curve might shift
• Shifts arising from changes in
Supply factor
more
less
Labor
increasing workers
decreasing workes
Capital
increse in the economy's capital
stock
decrese in the economy's capital
stock
Natural resources
The discovery of new mineral
A change in the availability of
resources
Technological knowledge
The invention of computers
opening up international trade
new regulations preventing firms
from using some production
methods
quantity of output
Price
level
Natural rate
of output
Wages,prices,and perceptions are
based on the expected price
level.
So when people change their
expectations of the price
level,the short run aggregate
supply curve shift.
20. 20
Index
• Long run and short run fluctuations
• Demand curve in the short run
• Supply curve in the short run
• Two causes of economis fluctuations
21. 21
Four steps for analyzing
macroeconomic flucuations
Step1
Step2
Step3
Step4
Decide whether the event shifts the aggregate demand curve or the
aggregate supply curve(or perhaps both)
Use the diagram of aggregate demand and aggregate
supply to determine the impact on output and the price
level in the short run.
Decide in which direction the curve shifts
Use the diagram of aggregate demand and aggregate supply to
analyze how the economy moves from its new short run
equilibrium to its long run equilibriu.
22. 22
A contraction in aggregate demand
P1
P2
P3
long run
aggregate
supply
Price
level
Quantity of uotput
short run
aggregate
supply,AS1
AS2
Aggregate
demand,AD1
AD2
A
B
C
3
4
2
1
1. A decrease in aggregate demand
2. …cause output to fall in the short run
3. ...but over time,the short run aggregate supply curve shirt
4. ...and outputs returns to its natural rate
23. 23
Three important lessons
from shift in aggregate demand
• In the short run,shifts in aggregate demand cause
fluctuations in the economy's output of goods and services.
• In the long run,shifts in aggregate demand affect the overrall
price level but do not affect output.
• Policymakers who influence aggregate demand can
potentially mitigate the severity of economic fluctuations.
24. 24
[case study1]
The great depression and world warⅡ
• Many economists place primary blame on the decline in the money supply.
ü Fed's failure,banking system.
• Other economists fave suggested alternative reasons for the collapse in
aggregate demand.
ü stock prices fell, financing distress
• Government purchases of goods and services increased almost fivefold
from 1939 to 1944.
ü devoting more resource to the military
25. 25
[case study2]
The recession of 2008-2009
Back ground
After bubble
bursting
Government
Policy
・Fed's lowered interest rates to historically low
levels.
・Substantial boom in the housing market.
・Development of securitization.
・Home owners were underwater.
・Various financial institutionsuffered from huge loss.
・The economy experienced a large contractionary
shift inaggregate demand.
･Fed cut its target for the federal funds rate from.
・Congress appropriateed ＄700 billion for the
Treasury to use to rescue the financial system.
・Large increase in government spending.
26. 26
The effect of a shift in aggregate supply
long run
aggregate
supply
Short run
aggreagte
suppply,
AS1
P1
P2
Price
level
A
B
AS2
Y1
Y2
long run
aggregate
supply
Short run
aggreagte
suppply,
AS1
P1
P2
Price
level
A
B
AS2
Y1
aggreagte demand
aggreagte demand、AD1
AD2
1.An adverse shift in the short
run aggregate supply curve
3...which causes the price
level to rise further
2....policy maker can
accomodate the shift by
expanding aggregate demad
4...but keep output at its
natural rate.
P3
27. 27
Two important lessons
from shift in aggregate demand
• Shifts in aggregate supply can cause stagflation- a
combination of recession(falling output) and
inflation(rising prices.)
• Policy makers who can influence aggregate
demand can potentially mitigate the adverse impact
on output but only at the cost of exacerbating the
problem of inflation.
28. 28
[case study3]
Oil and Economy
mid-1970s
the late 1970s
In 1986
OPEC attempted to thwart competition and reduce
production to raise prices.
・The OPEC countries again restricted the supply of
oil to raise the price.
・Squabbling broke out among members of OPEC.
・Member countries reneged on their agreements to
restrict oil production.
Recently
Conservation efforts and changes in technology
have reduced the economy's dependence on oil.
