Aggregate Models in Macroeconomics

Aggregate Models
(All parts of the economy taken as a whole)

Aggregate Demand (AD): Curve that shows the amount consumers are willing / able to buy at given price level. 

Slopes down

• Wealth Effect: as prices increase, income purchasing power falls
• Foreign Purchases Effect: as prices rise, US goods are more expensive and therefore demanded less by foreign consumers. 

Shifters:
Consumption (C) of Goods and Services by the Private Sector 

• Future Expectations:  How will the public react to fears of the future?
• Indebtedness:  Will, or can, the public keep borrowing into the future?
• Net Income:  How much money is left after paying taxes?

Gross Investment (Ig) Businesses must first use resources before selling.

• What effect will interest rates have on business’ ability to borrow?
• What kind of expectations will business have for future profits?
• What kind of profits will exist after taxes and dividends are paid?
• How quickly can new technology be applied to better construction?
• Is there already excess capacity available for short term growth?

Government (G)

• How much will government spend on goods and services?

Net Exports (Xn) or (X-M) (Export values minus Import values)

• Net income being sent back to the US versus Remittances from the US
• Value changes in the US Dollar and the effect on export/import prices

Aggregate demand is = ??

Aggregate Supply (AS): curve showing the relationship between the price level and the amount of real domestic output firms produce 

Slopes up: as PL increases, GDPr increases. 
 
Shifters
The cost and availability of resources

• The cost of paying for resources to build stuff

• How much Land, Labor, Capital, Entrep., Foreign Resources, Tech.?

Market Power/Control and Competition

• How much of the market (and pricing/profits) can this company control?

Productivity

• How efficient and productive is the labor force and the technology applied?

Gov. Regulations / Legal Environment

• What are the tax burdens on producers?
• What subsidies are available?
• What are the costs of dealing with governmental regulations?

Long Run Aggregate supply (LRAS): Measure of supply in the long run, with all resources variable. 

• no relationship between PL and Q of output in the long run. 

Vertical line: economy operating at efficiency.

Shifters:

• availability of resources
• changes in technology
• changes in productivity
• (equivalent to???)

(When LRAS shifts, so does SRAS)

Cover: 

• Inflationary gap 
• Recessionary gap 
• Equilibrium