AB 204 Unit 8 Aggregate Demand and Aggregate Supply – Discussion

AB 204 Unit 8: Aggregate Demand and Aggregate Supply – Discussion

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Aggregate Demand and Aggregate Supply

The Discussion topics deal with aggregate demand and aggregate supply, and the introduction to basic concepts in open-economy macroeconomics. The specific areas of discussions are the AS-AD model, AS and AD curves, macroeconomic goals, macroeconomic equilibrium, shocks in AS and AD demand, and key concepts in open-economy macroeconomics.

Read Chapters 18 and 20, and remember to include references and links to the websites that you feel are important contributors to your posts (comments). Respond to two of the following Discussion topics.

Unit 8 Discussion

Hey Everyone,

Discuss the importance AS-AD model in explaining the macroeconomic conditions of the economy and business cycles like recessions.
Model of Aggregate Supply (AS) and Aggregate Demand (AD) – “the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend” (Mankiw, 2015, p. 424)
“It is important to distinguish the reasons for the shift in aggregate demand in contrast to changes in aggregate supply. The general rule to follow is the key influence on the business cycle is changes in aggregate demand. Increases in aggregate demand raise economic output, GDP, and growth, and lower unemployment. Contractions of aggregate demand have the opposite effect. Aggregate demand is effective in changing economic growth only when aggregate demand is shifting along the relatively flat part of aggregate supply. When aggregate demand shifts along the vertical range of aggregate supply, changes in prices (inflation rates) are the only economic consequences” (Colorado.edu, 2015).
What factors shift AS and AD curves? 
AS Curves
1. Shifts Arising from Changes in Labor: an increase in the quantity of labor available (perhaps due to a fall in the natural rate of unemployment) shifts the aggregate-supply curve to the right. A decrease in the quantity of labor available (perhaps due to a rise in the natural rate of unemployment) shifts the aggregate-supply curve to the left.
2. Shifts Arising from Changes in Capital: an increase in physical or human capital shifts the aggregate-supply curve to the right. A decrease in physical or human capital shifts the aggregate-supply curve to the left.
3. Shifts Arising from Changes in Natural Resources: an increase in the availability of natural resources shifts the aggregate-supply curve to the right. a decrease in the availability of natural resources shifts the aggregate-supply curve to the left.
4. Shifts Arising from Changes in Technology: an advance in technological knowledge shifts the aggregate-supply curve to the right. A decrease in the available technology (perhaps due to government regulation) shifts the aggregate-supply curve to the left.
5. Shifts Arising from Changes in the Expected Price Level: a decrease in the expected price level shifts the short-run aggregate-supply curve to the right. An increase in the expected price level shifts the short-run aggregate-supply curve to the left (Mankiw, 2015, p. 440).
AD Curves
1. Shifts Arising from Changes in Consumption: an event that causes consumers to spend more at a given price level (a tax cut, a stock market boom) shifts the aggregate-demand curve to the right. An event that causes consumers to spend less at a given price level (a tax hike, a stock market decline) shifts the aggregate-demand curve to the left.
2. Shifts Arising from Changes in Investment: an event that causes firms to invest more at a given price level (optimism about the future, a fall in interest rates due to an increase in the money supply) shifts the aggregate-demand curve to the right. an event that causes firms to invest less at a given price level (pessimism about the future, a rise in interest rates due to a decrease in the money supply) shifts the aggregate-demand curve to the left.
3. Shifts Arising from Changes in Government Purchases: an increase in government purchases of goods and services (greater spending on defense or highway construction) shifts the aggregate-demand curve to the right. a decrease in government purchases on goods and services (a cutback in defense or highway spending) shifts the aggregate-demand curve to the left.
4. Shifts Arising from Changes in Net Exports: an event that raises spending on net exports at a given price level (a boom overseas, speculation that causes an exchange-rate depreciation) shifts the aggregate-demand curve to the right. An event that reduces spending on net exports at a given price level (a recession overseas, speculation that causes an exchange-rate appreciation) shifts the aggregate-demand curve to the left (Mankiw, 2015, p. 431).
How do you explain macroeconomic fluctuations using AS-AD model and AS/AD curves?
One possible cause of economic fluctuations is a shift in aggregate demand. When the aggregate-demand curve shifts to the left, for instance, output and prices fall in the short run. Over time, as a change in the expected price level causes wages, prices, and perceptions to adjust, the short-run aggregate-supply curve shifts to the right. This shift returns the economy to its natural level of output at a new, lower price level (Mankiw, 2015, p. 453).

A second possible cause of economic fluctuations is a shift in aggregate supply. When the short-run aggregate-supply curve shifts to the left, the effect is falling output and rising prices—a combination called stagflation. Over time, as wages, prices, and perceptions adjust, the short-run aggregate-supply curve shifts back to the right, returning the price level and output to their original levels (Mankiw, 2015, p. 453).

 
Reference
Mankiw, N. G. (2015). Principles of Macroeconomics (7th ed.). Stamford, CT: Cengage Learning.
Colorado.edu. (2015). The Business Cycle, Aggregate Demand and Aggregate Supply.  Retrieved from http://www.colorado.edu/economics/courses/econ2020/section7/section7-main.html

Unit 8 Discussion

Aggregate Demand and Aggregate Supply

The Discussion topics deal with aggregate demand and aggregate supply, and the introduction to basic concepts in open-economy macroeconomics. The specific areas of discussions are the AS-AD model, AS and AD curves, macroeconomic goals, macroeconomic equilibrium, shocks in AS and AD demand, and key concepts in open-economy macroeconomics.

Read Chapters 18 and 20, and remember to include references and links to the websites that you feel are important contributors to your posts (comments). Respond to two of the following Discussion topics.

Topic 1: Aggregate Supply (AS) and Aggregate Demand (AD) model and AS/AD curves are essential to understand macroeconomic fluctuations (business cycles).

Discuss the importance AS-AD model in explaining the macroeconomic conditions of the economy and business cycles like recessions.

What factors shift AS and AD curves? How do you explain macroeconomic fluctuations using AS-AD model and AS/AD curves?

Topic 2: Macroeconomic goals and macroeconomic equilibrium are the key elements in macroeconomics.

What are the long-run macroeconomic goals? What is long-run macroeconomic equilibrium? How the goals are relate to the macroeconomic equilibrium?

Suppose that consumers and investors become pessimistic about the future health of the economy. What will happen to aggregate demand and to output?

Unit 8 Discussion

a.   Model of Aggregate Supply (AS) and Aggregate Demand (AD) – “the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend” (Mankiw, 2015, p. 424).  It is important to recognize the reasons for the shift in aggregate demand in contrast to changes in aggregate supply.  To follow the rule is the key influence on the business cycle is changes in aggregate demand. Increases in aggregate demand raise economic output, GDP, and growth, and lower unemployment.  Aggregate demand is effective in changing economic growth only when aggregate demand is shifting along the flat part of aggregate supply.  When aggregate demand shifts along the vertical range of aggregate supply, changes in prices (inflation rates) are the only economic consequences” (Colorado.edu, 2015).

b.  AS Curves

Shifts Arising from Changes in Labor: an increase in the quantity of labor 

Shifts Arising from Changes in Capital: an increase in physical or human capital 

Shifts Arising from Changes in Natural Resources: an increase in the availability of natural resources

Shifts Arising from Changes in Technology: an advance in technological knowledge

Shifts Arising from Changes in the Expected Price Level: a decrease in the expected price level

        AD Curves

Shifts Arising from Changes in Consumption: an event that causes consumers to spend more at a given price 

Shifts Arising from Changes in Investment: an event that causes firms to invest more at a given price

Shifts Arising from Changes in Government Purchases: an increase in government purchases of goods and services

Shifts Arising from Changes in Net Exports: an event that raises spending on net exports at a given price level

One possible cause of economic fluctuations is a shift in aggregate demand.  A second possible cause of economic fluctuations is a shift in aggregate supply.

References

Mankiw, N. G. (2015). Principles of Macroeconomics (7th ed.). Stamford, CT: Cengage Learning.

Colorado.edu. (2015). The Business Cycle, Aggregate Demand and Aggregate Supply.  
Retrieved from http://www.colorado.edu/economics/courses/econ2020/section7/section7-main.html