Assumed constant along an aggregate supply curve are
Resource prices, including wage rates The state of technology The rules of the game that provide production incentives
that as the price level increases,
other things constant, the
purchases of the four major
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decision makers decline
AD
0 2 4 6 8 10 12 14 16
Real GDP trillions of 1996 dollars
More goods and services are available in the economy More people are employed
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Short History of U.S. Economy
History of the U.S. economy can be crudely divided into four economic eras
Introduction to Macroeconomics
CHAPTER 5
© 2003 South-Western/Thomson Learning
1
Gross Domestic Product
GDP = Gross Domestic Product
Focuses on the U.S. economy
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Leading Economic Indicators
Declines in leading economic indicators usually predict, or lead
to, a downturn and upturns point to an economic recovery
For example, in the early stages of a recession firms reduce overtime and new hiring, machinery orders slip, and the stock market turns down
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Aggregate Supply Curve
Aggregate supply curve shows how much output U.S. producers are willing and able to supply at each price level, other things constant
Increases in the amount and quality of resources, especially labor and capital
Better technology
Improvements in the rules of the game that facilitate production and exchange
Since the early 1980s
• Good economic growth • Moderate increases in the price level
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Exhibit 6: Decrease in Aggregate Demand between 1929 and 1933
Price level (1996 = 100)
• Was an era of generally strong economic growth • Moderate increases in the price level
From the early 1970s to the early 1980s
• High unemployment and high inflation
Aggregate demand is the relationship between the average price of aggregate output and the quantity of aggregate output demanded
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Price Level
Average price of aggregate output is called the price level
3
Economic Fluctuations
Economic fluctuations
The rise and fall of economic activity relative to the long-term growth trend of the economy
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Components of Business Cycles
Prior to and including the Greare often accompanied by a falling price level
After the Great Depression to the early 1970s
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Flow and Stock Variables
Flow Variable
An amount per period of time Average spending per week, hours worked per month, etc.
Stock Variable
An amount measured at a particular point in time Amount of cash on hand you have now Number of housing units in existence today
Peak Trough
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U.S. Growth
U.S. economy in 2001 was more than eleven times larger than in 1929 as measured by real gross domestic product – real GDP
Real GDP means the effects of changes in the economy’s price level have been stripped away the remaining changes reflect real changes in the value of
goods and services produced
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Exhibit 2: Annual Percentage Change in U.S. Real GDP from 1929 to 2003
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Increases in Production
Production tends to increase over the long run because of
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Exhibit 5:Aggregate Demand & Supply
Equilibrium in the national
economy occurs where the
150
AD and AS curves intersect.
109 100
50
0
Price level (1996 = 100)
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GDP Price Index
After adjusting GDP for price changes,
we end up with what is called the real gross domestic product, or real GDP
The GDP price index
Shows how the economy’s general price level changes over time Can be used to convert production in different years into dollars of constant purchasing power
Measures the market value of all final goods and services produced in the United States during a given period
Helps us keep track of the economy’s incredible variety of goods and services
The price level in any year is an index number, or reference number,
comparing average prices that year to average prices in some base, or reference, year
Milder contraction Decline in total output lasting at least two consecutive quarters
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Exhibit 1: Hypothetical Business Fluctuations
A recession begins after the previous expansion has reached its peak, or high point and continues until the economy reaches a trough, or low point.
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Aggregate Demand Curve
Aggregate demand curve shows the
relationship between the price level in the economy and the real GDP demanded, other things constant