Economic Stabilization Policy

Macroeconomics seeks balance through supply and demand.

Macroeconomic Equilibrium

Supply and demand tools help determine equilibrium price and quantity of output

Aggregate supply assumes money supply is fixed and that a given price level prevails. If price changes, individual firms respond by

adjusting their output. After many price changes, an aggregate supply curve

can be constructed. Price level includes the price of everything produced

in the economy. Real GDP—value of all goods and services produced

Aggregate Supply and Demand

Equation of Aggregate Supply

Aggregate Supply = the sum of the GOODS and SERVICES provided in an economy. (One way to measure GDP)

Aggregate Supply and Demand

Changes in aggregate supply: INCREASE in the size and/or quality of labor

force results in a INCREASE in aggregate supply

DECREASE in the size and/or quality of labor force results in a DECREASE in aggregate supply

Aggregate Supply and Demand

Changes in aggregate supply: INCREASE in the size and/or quality of capital

stock results in a INCREASE in aggregate supply

DECREASE in the size and/or quality of capital stock results in a DECREASE in aggregate supply

Aggregate Supply and Demand

Changes in aggregate supply: Technological progress results in a RISE in

Aggregate Supply, INCREASE in the factor productivity of labor and

land results in an INCREASE in Aggregate Supply DECREASE in the factor productivity of labor and

land results in an DECREASE in Aggregate Supply

Aggregate Supply and Demand

INCREASE in the Wage Costs per Unit of Output results in a DECREASE in Aggregate Supply

DECREASE in the Wage Costs per Unit of Output results in a INCREASE in Aggregate Supply

Inflation Expectations

Aggregate Supply and Demand

An INCREASE in Producer Taxes results in a DECREASE in Aggregate Supply

A DECREASE in Producer Taxes results in an INCREASE in Aggregate Supply

An INCREASE in Producer Subsidies results in an INCREASE in Aggregate Supply

A DECREASE in Producer Subsidies results in a DECREASE in Aggregate Supply

Aggregate Supply and Demand

Aggregate Supply and Demand

Aggregate demand is the total of all demand in the economy.

Aggregate Demand = C + I + G + NX (Is this familiar?)

The aggregate demand curve shows the amount of total output purchased at every price level

Aggregate Supply and Demand

Changes in aggregate demand An increase in C, I, G, or NX will

result in an INCREASE in Demand. (Shift to the right)

A decrease in C, I, G, or NX will result in an DECREASE in Demand. (Shift to the left)

Aggregate Supply and Demand

Aggregate Supply and Demand

Aggregate supply and demand curves provide a framework to help analyze the impact of economic policy proposals on economic growth and price stability.

Macroeconomic equilibrium is the point at which the level of real GDP is consistent with a given price level

The equilibrium will change if either AS or AD changes.

Macroeconomic Equilibrium

Macroeconomic Equilibrium

Macroeconomic Equilibrium