MACROECONOMICS AGGREGATE--AGGREGATE DEMAND-AGGREGATE SUPPLY....NJOY...

1. MACROECONOMIC AGGREGATES AGGREGATE-DEMAND & AGGREGATE-SUPPLY BY :- SHIVPAL SINGHJ (ITM, NAVI MUMBAI)

3. Developed out of the broader field of political economy owing to a desire to use an empirical approach.

4. Aim to explain “how” economics work and economic agent “interact”.

6. Common distinctions are drawn between various dimensions of economics.

7. The textbook distinction are drawn between micro and macro concepts.

10. Microeconomics focus on “What” and “For whom”.

11. Explores how various system of incentives and way of making decisions work.

12. Provides the concept of economic efficiency.

14. Deals with situation/condition with a long run effect.

16. DIFFERENCE BETWEEN MICROECONOMICS AND MACROECONOMICS

17. AGGREGATE-DEMAND In economics aggregate demand is the total demand for final goods and services in the economy at a given time and price level. Aggregate demand is the gross domestic product of a country when inventory levels are static.

18. Aggregate Demand The sum of all expenditure in the economy over a period of time Macro concept – WHOLE economy Formula: AD = C+I+G+(X-M) C= Consumption Spending I = Investment Spending G = Government Spending (X-M) = difference between spending on imports and receipts from exports (Balance of Payments)

19. Aggregate Demand –Key Variables Consumption Expenditure Investment Expenditure Government Expenditure Import Spending Export Earning

20. Consumption Expenditure Exogenous factors affecting consumption: Tax rates Incomes – short term and expected income over lifetime Wage increases Credit Interest rates Wealth Property Shares Savings Bonds

21. Investment Expenditure Spending on: Machinery Equipment Buildings Infrastructure Influenced by: Expected rates of return Interest rates Expectations of future sales Expectations of future inflation rates

22. Government Spending Defence Health Social Welfare Education Foreign Aid Regions Industry Law and Order

23. Import Spending (negative) Goods and services bought from abroad – represents an outflow of funds from the country (reduces AD)

24. Export Earnings (Positive) Goods and services sold abroad – represents a flow of funds into the country (raises AD)

25. Aggregate Demand Curve The aggregate demand (AD) curve is a curve that shows the negative relationship between aggregate output (income) and the price level

26. Deriving the Aggregate Demand Curve To derive the aggregate demand curve, we examine what happens to aggregate output (income) (Y) when the price level (P) changes, assuming no changes in government spending (G), net taxes (T), or the monetary policy variable (Ms).

27. Deriving the Aggregate Demand Curve The AD curve is not a market demand curve, and it is not the sum of all market demand curves in the economy. It is a more complex concept.

28. Aggregate Demand Curve Aggregate demand falls when the price level increases because the higher price level causes the demand for money to rise, which causes the interest rate to rise. It is the higher interest rate that causes aggregate output to fall. At all points along the AD curve, both the goods market and the money market are in equilibrium.

29. Reasons why AD is downward sloping The consumption link: The decrease in consumption brought about by an increase in the interest rate contributes to the overall decrease in output. The real wealth effect, or real balance, effect: When the price level rises, there is a decrease in consumption brought about by a change in real wealth.

30. Shifts in AD Changes in Governmental Policies Changes in Monetary Policy Changes in Expectations of Households and Firms

31. Factors that Effect Aggregate Demand 1. Income 2. Wealth 3. Population 4. Interest rates 5. Credit availability 6. Government demand 7. Taxation 8. Foreign demand 9. Investment 10. Expectations (a) Inflationary (b) Income (c) Wealth (d) Interest rate (+) (+) (+) (–) (+) (+) (–) (+) (+) (+) (+) (+) (+)

32. AGGREGATE SUPPLY

34. It is not a market supply curve ,and it is not simple sum of all individual supply curves.

37. As economy approaches capacity, the curve becomes nearly vertical.

40. Firms are often slow to adjust wages.

42. Factors That Shift the Aggregate Supply Curve Shifts to the LeftDecreases in Aggregate Supply Shifts to the RightIncreases in Aggregate Supply Higher costshigher input prices higher wage rates Lower costs lower input prices lower wage rates Stagnationcapital deterioration Economic growth more capital more labor technological change Public policywaste and inefficiency over-regulation Public policysupply-side policies tax cuts deregulation Bad weather, natural disasters, destruction from wars Good weather Shifts of the Short-RunAggregate Supply Curve

44. AS represents price/output decisions of all firms in ecomony.

48. Classical Economics Popularly accepted theory prior to the Great Depression of the 1930s. Says the economy will automatically adjust to full employment. Classical economics is mainly based upon: Barter economy Supply creates its own demand in a macro economy. Wages and prices are flexible and increase or decrease to ensure that the economy operates at full employment. Savings always equals investment, because changes in the interest rate bring savings and investment into equality.

50. Keynesian Economics Based on the work of John Maynard Keynes, who focused on the role of aggregate spending in determining the level of macroeconomic activity. Introduced the idea that a macro economy seeks an equilibrium output level. Keynesian theories - The labour market The market for loanable funds (money market) The Multiplier Keynesian inflation theory

53. Firms would be even less inclined to invest because they would find the demand for their products decreasing.MULTIPLIER EFFECT-

55. Rise in wages

58. Increasing taxation (either direct or indirect) to discourage spending

59. Increasing interest rates to discourage saving

61. BIBLIOGRAPHY MACROECONOMICS –THEORY & POLICY—H L AHUJA MACROECONOMICS—M L JHINGAN PRINICPLES OF ECONOMICS—PEARSON WIKIPEDIA WIKINOMICS.COM

62. THANK YOU