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Chapter 10 Macro Equilibrium

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 I. Macro Equilibrium
     A. Macro equilibrium exists when the demand and supply variables affecting
          total 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 non-price
          level determinants constant yields the 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
                  increasing AD.
              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 
                  accumulations (savings) will maintain their value. 
              b. 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 demand and
their determining
           characteristics
           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 interest increase
                   consumption. 
               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)
           4. Net 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 economic activity.

  

 

 

As prices drop, the amount of real gross domestic product purchased (AD) increases.

AD = C + I + G + XN

Like all demand curves, AD increases to the right  and decreases to the left.

III. Aggregate supply (AS) 
      A. Aggregate Supply is a schedule of the amounts of Real Gross Domestic Product 
           companies are willing to produce at various
price levels. Holding non-price 
           determinants constant yields
the following analysis of how price levels affect AS.
           1. Keynesian Range: increases in AD increase real GDP and prices do not change
           2. Intermediate Range: both prices and real GDP change
           3. Classical Range: increases in AD increases prices and real 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.

IV. Static equilibrium is where AD and AS
       intersect

       

V. Dynamic equilibrium depicts changes in  AD
     and AS over time
      A. GDP grows to Q'.
      B. Prices increase to P'.     

VI. Demonstrations 
       A. AD, AS, and Long Run Aggregate Supply- ACDC Economics
     
 B.
Aggregate Demand and Aggregate Supply model
       C.
The Aggregate Demand and Aggregate Supply Model  
            by Dennis Kaufman of the University of Wisconsin-Parkside

VII. Readings
   
   A.  US macro disequilibria (Oct 2008)
       B.  What is economic equilibrium explores a few kinds. 4/10/13, N. Smith

VIII. Videos for econ majors
        Crash Course in Non-Equilibrium Economics # 1 of a series

 

 

 

Note: There are no questions associated with this chapter as the material will be reexamined and questions posed in the next few chapters.

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