Ebook Macroeconomics policy and practice: Part 2
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Ebook Macroeconomics policy and practice: Part 2
The Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to Ebook Macroeconomics policy and practice: Part 2 a record high of over S140 per barrel by July 2008 and sending gasoline prices to over $4 per gallon. At the same time, defaults by borrowers with weak credit records in the subprime mortgage market seized up the financial markets and caused consumer and business spending to decline. The result was Ebook Macroeconomics policy and practice: Part 2 a severe economic contraction at the same time that the inflation rate spiked.To understand how developments in 2007-2008 had such negative effects oEbook Macroeconomics policy and practice: Part 2
n the economy, we now put together the aggregate demand and aggregate supply concepts from the previous three chapters to develop a basic tool, aggregThe Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to Ebook Macroeconomics policy and practice: Part 2the aggregate demand and aggregate supply curves.Aggregate demand and supply analysis is a powerful tool for studying short-run fluctuations in the macroeconomy and analyzing how aggregate output and the inflation rate are determined. The analysis will help US interpret episodes in the business cycl Ebook Macroeconomics policy and practice: Part 2e such as the recent severe recession in 2007-2009. In addition, in later chapters it will also enable US to evaluate the debates on how economic poliEbook Macroeconomics policy and practice: Part 2
cy should be conducted.Recap of the Aggregate Demand and Supply CurvesAs a starting point, let's take stock of the building blocks for the aggregate dThe Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to Ebook Macroeconomics policy and practice: Part 2 THE AGGREGATE DEMajmu mjmu ovr'r'L’ MWCL tooThe Aggregate Demand CurveRecall that the aggregate demand curve indicates the relationship between the inflation rate and the level of aggregate output when the goods market is in equilibrium, that is, when aggregate output equals the total quantity of o Ebook Macroeconomics policy and practice: Part 2utput demanded. We saw in Chapter 10 that the aggregate demand curve is downward sloping because a rise in inflation leads the monetary policy authoriEbook Macroeconomics policy and practice: Part 2
ties to raise real interest rates to keep inflation from spiraling out of control, which lowers planned expenditure (aggregate demand) and hence the eThe Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to Ebook Macroeconomics policy and practice: Part 2emand curve can be illustrated by the following schematic.tt] rt => I I, cl, NX ị => Y 1Factors That Shift the Aggregate Demand CurveAs we saw in Chapter 10, six basic factors that arc exogenous to the model can shill the aggregate demand curve to a new position: 1) autonomous monetary policy, 2) go Ebook Macroeconomics policy and practice: Part 2vernment purchases, 3) taxes, 4) autonomous net exports, 5) autonomous consumption expenditure, and 6) autonomous investment. As we examine each case,Ebook Macroeconomics policy and practice: Part 2
we ask what happens when each of these factors changes holding the inflation rale constant. As a study aid, liible 12.1 summarizes the shifts in the The Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to Ebook Macroeconomics policy and practice: Part 2raises the autonomous component of the real interest rale, r, that is unrelated to the current level of the inflation rale. The higher real interest rate at any given inflation rate leads to a higher cost of financing investment projects, which loads to a decline in investment spending and planned e Ebook Macroeconomics policy and practice: Part 2xpenditure. Higher real interest rales also lead to lower consumption spending and net exports. Therefore the equilibrium level of aggregate output faEbook Macroeconomics policy and practice: Part 2
lls al any given inflation rale, as the following schematic demonstrates.rt => /l,Ci,NXl=>YiThe aggregate demand curve therefore shifts to the left.TAThe Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to Ebook Macroeconomics policy and practice: Part 2s, TI*— Autonomous net exports, NXĨ“* Consumer optimism, ct“* Business optimism, 1Ì“* Note: Only increases (t) in the factors are shown. Tile effect of decreases in the factors would be the opposite of those indicated in the "Shift" column.https://khothuvien.cori!286 PART FOUR . BUSINESS CYCLES: THE Ebook Macroeconomics policy and practice: Part 2 SHORT RUN2Government purchases. An increase in government purchases at any given inflation rate adds directly to planned expenditure and hence the eqEbook Macroeconomics policy and practice: Part 2
uilibrium level of aggregate output rises:G ĩ => YĨAs a result, the aggregate demand curve shifts to the right.3Taxes. At any given inflation rate, anThe Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to Ebook Macroeconomics policy and practice: Part 2f aggregate output falls:T t => Cl => YiAt any given inflation rale, lhe aggregate demand curve shifts to the left.4Autonomous net exports. An autonomous increase in net exports at any given inflation rate adds directly to planned expenditure and so raises the equilibrium level of aggregate output:N Ebook Macroeconomics policy and practice: Part 2XT ->Y1Titus the aggregate demand curve shifts to the right.5Autonumeus consumption expenditure. When consumers become more optimistic, autonomous conEbook Macroeconomics policy and practice: Part 2
sumption expenditure rises and so they spend more at any given inflation rate. Planned expenditure therefore rises, as does lite equilibrium level of The Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to Ebook Macroeconomics policy and practice: Part 2stment rises and they spend more al arty given inflation rate. Planned investment increases and the equilibrium level of aggregate output rises.71 =>YĨI he aggregate demand curve shifts to the right.Short- and Long-Run Aggregate Supply CurvesAs we saw in the preceding chapter, the aggregate supply c Ebook Macroeconomics policy and practice: Part 2urve, which indicates the relationship between the total quantity of output supplied and the inflation rate, comes in short- and long-run varieties.The Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing to The Aggregate Demand and Supply ModelPreviewIn 2007 and 2008, the U.S. economy encountered a perfect storm. Oil prices more than doubled, climbing toGọi ngay
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