I. Macro Equilibrium
Macro equilibrium exists when the demand and supply variables affecting
economic activity are in balance and under no
pressure to change
B. Macro equilibrium exists even though
the more slowly changing variables
affecting long-term activity are still in flux. Said
long-term activity is called
a long-term secular trend.
II. Aggregate Demand (AD)
A. Aggregate demand is
a schedule matching the Real Gross Domestic
Product a country purchases at
various price levels.
B. Price level is the key determinate of aggregate demand. Holding
level determinants constant yields
following analysis of why price levels
and aggregate demand are inversely related. That is, as prices decrease,
Real GDP increases.
1. Interest rate effect
a. If the price (inflation) is low, interest rates will be low.
b. Low interest rates will cause
consumption and investment to be high
c. This is especially true
when home mortgages are easily refinanced at
lower interest rates.
2. Real asset balance effect
a. When inflationary expectations are low, people think their past
(savings) will maintain their value.
This feeling results in
people spending more which increases AD.
3. Low domestic inflation relative to foreign inflation results in low-priced
exports selling better which increases AD
4. High price levels will bring opposite results
C. Non-price level determinants of aggregate
1. Consumption (C)
a. Wealth, if expected to increase, increases consumption.
b. Expectations, like more overtime, increase consumption.
c. Debt decreasing like refinancing a home at lower
d. Taxes, if lowered, increase consumption.
2. Investment (I)
a. Profit expectations, if high, increase investment.
b. Business taxes, if decreased, increase investment.
c. Excess capacity, if low, increases investment.
d. Technology outlook, if positive, increase investment .
3. Government Spending (G)
Exports (XN) (exports minus imports)
a. Economic activity abroad
b. Exchange rates
D. Price level and non-price level factors
together determine aggregate
demand which interacts with aggregate supply
to determine total
III. Aggregate supply (AS)
A. Aggregate Supply is a schedule of the amounts
of Real GDP
companies are willing to produce at various
Holding non-price determinants constant yields
analysis of how price
levels affect AS.
1. Keynesian Range: increases in AD increase real GDP and
prices do not
2. Intermediate Range: both prices and real GDP change
3. Classical Range: increases in AD increases prices and
GDP does not
change because full employment exists
B. Non-price factors affecting aggregate supply
1. Factor prices: decrease in factor
prices will increase AS
2. Productivity: increases in
productivity will increase AS
3. Domestic and foreign tranquility
will increase AS
Like all supply curves,
AS increases to the right and
decreases to the left.
Will less investment affect
the rate AS increases?
equilibrium is where
AD and AS intersect
Dynamic equilibrium depicts
changes in AD and AS over time
A. GDP grows to Q'.
B. Prices increase to P'.
Videos, Readings and Stuff for Econ Majors
AD, AS, and Long Run Aggregate Supply- ACDC
Aggregate Demand and Aggregate
The Aggregate Demand
and Aggregate Supply Model
by Dennis Kaufman of
the University of Wisconsin-Parkside
is a criticism of econometric policy evaluation
procedures that fail to
recognize that optimal decision rules of
economic agents vary
systematically with changes in policy.
US macro disequilibria (Oct 2008)
What is economic equilibrium explores a few kinds. 4/10/13, N. Smith
D. Videos for econ majors
Crash Course in Non-Equilibrium Economics
Non-Equilibrium Economics Schumpeter, Fisher and Keynes 5/5/14