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Class Notes Introduction To Macroec

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12 views2 pages

Class Notes Introduction To Macroec

notes

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krish1shenoy123
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Class Notes: Introduction to Macroeconomics

Lecture 7: Aggregate Demand and Aggregate Supply

Date: August 24, 2024


Professor: Dr. John Maxwell

1. Review of Last Lecture


GDP and National Income Accounting: Discussed the components of Gross Domestic
Product (GDP) and the methods of calculating it.
Inflation: Introduced the concepts of inflation, Consumer Price Index (CPI), and
the GDP deflator.
2. Understanding Aggregate Demand (AD)
Definition: Aggregate Demand (AD) represents the total quantity of goods and
services demanded across all levels of an economy at a particular price level and
in a given period.

AD Equation:

𝐴
𝐷

𝐶
=

𝐼
+

𝐺
+

𝑋
(

𝑀
−

)
AD=C+I+G+(X−M)
Where:

𝐼
C is Consumption.

𝐺
I is Investment.

𝑋
G is Government Spending.

𝑀
X is Exports.

M is Imports.
AD Curve:

Downward Sloping: The AD curve slopes downward, indicating that as the price level
falls, the quantity of goods and services demanded increases.
Shifts in AD Curve: Factors that can shift the AD curve include changes in consumer
confidence, interest rates, government policies, and external economic conditions.
3. Understanding Aggregate Supply (AS)
Definition: Aggregate Supply (AS) represents the total quantity of goods and
services that producers in an economy are willing and able to supply at a given
price level.
Short-Run Aggregate Supply (SRAS):
Upward Sloping: In the short run, the AS curve is upward sloping, indicating that
as the price level increases, firms are willing to produce more goods and services.
Factors Affecting SRAS: Changes in resource prices, wages, and production
technology can shift the SRAS curve.
Long-Run Aggregate Supply (LRAS):
Vertical Curve: In the long run, the LRAS curve is vertical, representing the
economy’s maximum potential output, or full employment output.
Shifts in LRAS: Factors that can shift the LRAS curve include changes in the labor
force, capital stock, and technology.
4. Macroeconomic Equilibrium
Intersection of AD and AS Curves:

The point where the AD and SRAS curves intersect determines the short-run
macroeconomic equilibrium, which gives the equilibrium price level and output.
In the long run, the economy tends to adjust towards the point where AD intersects
with LRAS.
Short-Run vs. Long-Run Equilibrium:

Short-Run Disequilibrium: Can occur due to unexpected shifts in AD or SRAS, leading


to inflationary or recessionary gaps.
Long-Run Adjustment: The economy self-corrects over time, moving back to full
employment output.
5. Impacts of Economic Shocks
Demand Shocks:

Positive Demand Shock: Increases in consumer confidence, government spending, or


investment can shift the AD curve to the right, leading to higher output and price
levels.
Negative Demand Shock: Decreases in these factors can shift the AD curve to the
left, causing lower output and potentially leading to a recession.
Supply Shocks:

Positive Supply Shock: Technological improvements or reductions in resource prices


can shift the SRAS curve to the right, increasing output and reducing prices.
Negative Supply Shock: Increases in resource prices or natural disasters can shift
the SRAS curve to the left, decreasing output and raising prices (stagflation).
6. Policy Implications
Monetary Policy:

Central banks can influence AD by adjusting interest rates and the money supply.
Lowering interest rates can stimulate AD, while raising rates can restrain it.
Fiscal Policy:

Government spending and taxation directly impact AD.


Expansionary fiscal policy (increased spending or tax cuts) can shift AD to the
right, while contractionary fiscal policy (decreased spending or tax hikes) can
shift it to the left.
7. Conclusion and Next Steps
Next Lecture: Exploring the Phillips Curve and the relationship between inflation
and unemployment.
Homework: Analyze the effects of a positive demand shock on short-run and long-run
macroeconomic equilibrium.

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