Aggregate supply and Aggregate DemandFoundation of MicroeconomicsAlaleh Mani2011

Total review Aggregate Supply : Long- run and movement along Long -run

supply and change in Potential GDP and fluctuation in aggregate supply

Short- run and Movement along short- run supply and change in money wage rate and fluctuation in aggregate supply demand

Aggregate Demand: Movement along demand Change the aggregate demand Macroeconomic long -run and short -run equilibrium

Long-run Aggregate Supply and movement along LAS and Change in LAS Long -run is the time real wage rate

adjust to full employment

Pri

ce L

evel

Potential GDP= GDP at full employmentindependent to price

∆ money wage rate=∆ goods and service price real wage rate= fix labor quantity= fix GDP = fix Price level change movement along LAS

1.Quantity of labor at full employment 2.Human and physical capital3.Technology advances

Short-run Aggregate Supply and movement along SAS and SAS shift

Long -run is the time real wage rate and other variable remain fix

Pri

ce L

evel

∆ goods and service price and money wage rate= fix Price level change movement along SAS

Real GDP>Potential GDPReal GDP>Potential GDP

SAS change by money wage rate: 1.departure from full employment 2.Expectation of inflation

SAS change by potential GDP change

Aggregate Demand Total economic production is bought by : 1.real consumption expenditure (C) 2. Investment (I) 3. Government Expenditure ( G) 4.net export (X-M)

Y= C+I+G+X-M

Aggregate Demand Curve

Change along the AD 1.Wealth effect: Price level Wealth (bond, stock, saving) restore wealth (for health, education,

retirement) saving C Demand for GDP 2.Substitution effect:Price level Real value of moneyinterest rate Delay in C and I and X-M GDP demand

Intertemporal substitution effect: substitution across time

Shift of the Aggregate Demand Expectation:

E(Income) E(inflation) E(Profit) Investment I

Fiscal Policy: Tax Transfer Payment: unemployment benefit, welfare Expenditure on goods and services

Disposable Income =Income-Tax +Transfer Payment Monetary policy: fed change the quantity of money The world economy:

Exchange rate :if ER falls local product is sold more Foreign Income:

Consumption C

Consumption

Save

Consumption

Save

Equilibrium

Real GDP

Money wage adjust

Economic Growth and Inflation

LAS >>AD: Growth :1.Technology2.Labor3.Capital

AD>> LAS : Inflation:1.Money Quantity rise2.AD speed up to LAS

Business CycleOutput gap=Recessionary Gap

Output gap=Inflationary Gap

LAS

LAS

LAS

SASSAS

SAS

ADADAD

Full employment

Potential GDP Inflationary Gap

Recessionary Gap

Money Wage rate =sticky=fix

StagflationRecession and inflation together:Oil price rise production fall

School of thought

School of thought

Founders Economic Perception

AS Fluctuation

ADFluctuation

Policy

Classic and New Classic

Adam zmith,Ricardo,Miller

Self regulated at full employment

TechnologyMoney wage rate is flexible and rapidly adjust

Technology increase the demand for new plant and equipment but increase the useful life of old one

Tax is inefficient

Keynesian and new keynsian

Keynes Fiscal and monetary are needed

Money wage rate is sticky so need helpNew keynesian say good’s price are sticky as well

Expectation Fiscal and monetary policy needed

Monetarist Fridman, Burnner Self regulated at full employment

Money wage rate is sticky

Quantity of money Inappropriate monetary policy should stopTax is inefficient