Real Domestic Output

1
AD/AS Shifters
AD
SRAS
Price Level
REP
CIG-X
Production cost
PLe
Real Domestic Output
Ye
2
Increase in AD
caused by CIgGXn
Increase in AD 1. Increase in Consumption a.
aggregate wealth increases b. expected increase
in inflation c. low consumer debt d. decrease
in consumer taxes e. decrease in interest
rates 2. Increase in Investment a. decrease in
interest rates b. positive profit
expectations c. inventories are low d.
business taxes are reduced 3. Increase in Gov.
spending a. on military spending b. on
the infrastructure c. on health care 4.
Increase in Net exports Xn A. Dollar
depreciates B. Trade partners incomes rise
SRAS
AD2
LRAS
AD1
Price Level
YF
YR
Real Domestic Output, GDP
3
Decrease in AD
caused by CIgGXn
Decrease in AD 1. Decrease in Consumption a.
aggregate wealth decreases b. expected decrease
in inflation c. large consumer debt d. increase
in consumer taxes e. increase in interest
rates 2. Decrease in Investment a. increase in
interest rates b. negative profit
expectations c. excess inventories d. business
taxes are increased 3. Decrease in Gov. spending
a. on military spending b. on the
infrastructure c. on health care 4. Decrease
in Net exports Xn A. Dollar appreciates
B. Trade partners incomes fall
SRAS
AD1
LRAS
AD2
Price Level
YF
YR
Real Domestic Output, GDP
4
Increase in AS
caused by REP
Increase in AS REP Resource Cost domestic
a. More land, labor, capital
entrepreneurs b. of sellers increase
Resource Cost overseas c. Imported inputs
decrease in price d. Dollar appreciates Environ
ment legal-institutional a. Increase in
subsidies b. Decrease in bus. regulations
c. Decrease in business taxes Productivity
Increase in productivity
AD
AS1
AS2
PL
RGDP
5
Decrease in AS
caused by REP
Decrease in AS REP Resource Cost domestic
a. Land, labor, capital become more scarce b.
Number of sellers decrease Resource Cost
overseas c. Imported inputs increase
in price d. Dollar depreciates Environment
legal-institutional a. Decrease in
subsidies b. Increase in bus. regulations c.
Increase in business taxes Productivity Decrease
in productivity
AD
AS3
AS1
PL
RGDP
6
Points of Emphasis for AD/AS Questions

• 1. Wages (labor), this is resource cost, so AS
  shifter
• 2. Increase/decrease in union workers hired
• they get paid more so labor, so AS
  shifter.
• 3. Appreciation/depreciation of a currency
  either AD or AS
• a. Resource cost part of REP AS
  shifter.
• b. Exports are part of CIgGXn AD
  shifter.
• 4. Regulations and subsidies legal
  institutional
• Environment, part of REP, so AS shifter.
• 5. For all CIgGXn, does the situation
  result in
• an increase or decrease in AD therefore
  GDP?
• 6. For REP, think of production costs
• if producers make more money, there is an
  increase in AS,
• if producers make less money there is
  a decrease in AS.

7
Caused by a Change in PL
Change In AQS
Change In AQD
Inverse
DIRECT
AS
AD
PL1
PL1
PL2
PL2
AQS2
AQS1
AQD2
AQD1
8
AD/AS Practice Quiz 2
REP
___1. A widespread fear of depression on the part
of consumers. ___2. A large purchase of wheat by
Canada, one of our trade partners. ___3. Our
exports are affected by an appreciation of the
dollar. ___4. A reduction in interest rates
although price level remains constant. ___5. A
huge cut in government expenditures on the
military. ___6. Consumer expectations of a rapid
rise in the prices. ___7. The breakup of OPEC,
causing oil prices to fall by 1/3 . ___8. A 20
reduction in personal income tax rates. ___9.
An increase in labor productivity. ___10. A 12
increase in worker wages. ___11. Imported
resources are affected by a depreciation of the
dollar. ___12. A decline in the national incomes
of our trading partners. ___13. An increase in
the of the U.S. labor force which is unionized.
B
A
B
A
B
A
C
A
C
D
D
B
D
9
AD/AS Practice Quiz 3
A. Incr in AD B. Decr in AD C. Incr in
AS D. Decr in AS Which diagram above
portrays ___1. A decrease in consumer
spending? ___2. The impact on net exports caused
by increases in the national incomes of
our major trading partners? ___3. A large
increase in the price of imported oil which
impact the resource cost of
businesses? ___4. A large increase in government
spending on our highway system? ___5. A
substantial increase in wages that businesses
pay their workers? ___6. The effect on
investment if there are negative business
profit expectations? We are heading into a
recession. ___7. A decrease in interest rates
even though there is no change in price
level? ___8. The government picking up the
tuition tab for all of the nations
private school students who have made a 90
or above in high school economics? ___9. A
major increase in productivity? ___10. 25 stock
market increase over a two month period?
B
A
D
A
D
B
A
A
C
A
10
AD/AS Review
Chg in AQD
Chg in AD
1. Price level changes cause (shifts of the AD or
AS curve/movements from one point to another on a
stable AD or AS curvechanges in AQD or AQS. 2.
What 3 effects cause an increase or decrease in
AQD? _____________, ___________________,
________________ effects. 3. What will not shift
the AD or AS curves? ________________ 4. How does
a decrease in price level affect the real value
of wealth? (increase/decrease) consumption?
(incr/decr) increases/decreases)
(AD/AQD). 5. What does an increase in price level
do to the demand for money?
(increase/decrease) affect interest rates?
(incr/decr) affect consumption?
(incr/decr) incr/decr) (AD/AQD). 6. A
decreasing U.S. price level (incr/decr) U.S.
exports and (increases/decreases)
(AD/AQD). 7. An increase in the national incomes
of our trading partners (incr/decr) our net
exports which will lead to an (incr/decr)in
(AD/AQD). 8. An appreciation of the dollar will
(incr/decr) AS but (incr/decr) AD. A
depreciation of the dollar will (incr/decr) AS
but (incr/decr) AD.
Foreign purchase
Real-balance
Interest Rate
change in price level
11
9. If the interest rate decreases because price
level decreases we will have an
(increase/decrease) in (AD/AQD).10. If the
interest rate decreases but price level remains
constant we will have an (increase/decrease)
in (AD/AQD).
11. If the PPC shifts out (more resources or
technology), then the (AD/AS) curve shifts
(right/left). 12. Productivity (is/is not)
affected when resource cost decreases. 13. What
economic event brought the curtain down on the
classical show?_____________________________
__________ What economic event brought the
curtain down on the Keynesian show?
_______________________________________ 14. Who
said Suply creates demand? ________________ 15.
During a depression, the policy of the
(Classicals/Keynesians) is Do
nothing. 16. The (Classicals/Keynesians) believe
government should take an active role. 17.
The (Classicals/Keynesians) said, Savers save
more at higher interest rates.
The Great Depression
Stagflation
Joseph Say
12
AD/AS Review
RAP
CIgGXn
PL2
E2
E2
Y2
13
Classical v. Keynesian
___ 1. Left alone, the economy always is at full
employment, or if in a short
recession, it will get back to FE quickly.___ 2.
The government needs to take an active role in
the economy.___ 3. Long labor union
contracts result in wages being sticky
down in the short run.___ 4. The interest rate
is a more important determinant of
investment than profit expectations.___ 5. We
believe the recession will be short due to
flexible prices and wages.___ 6. The Great
Depression was evidence that the
economy doesnt necessarily correct to full
employment.___ 7. Increased savings will not
cause a recession because more
savings means lower in. rates more
investment.___ 8. Says Law says all output will
be demanded.___ 9. The higher the interest rate,
the more savers will save.___ 10. More saving
will not necessarily equal more investment.
C
K
K
C
C
K
C
C
C
K