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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
         1. Demand variable total to Aggregate Demand
         2. Supply variables total to Aggregate Supply
    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.

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

AD = C + I + G + XN

 

      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 now that 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.

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 different 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

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. Dynamic demonstrations
     
A. The Income-Expenditure Model  by Dr. Ted Black of the University of Maryland for an income/expenditure approach
           to macro equilibrium.

      B. The Aggregate Demand and Aggregate Supply Model by Dennis Kaufman of the University of Wisconsin-Parkside
 

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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