L6 - Tagged
L6 - Tagged
L6 - Tagged
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 1
posted to a publicly accessible website, in whole or in part.
Economic Fluctuations, Part 1
• Economic activity
– Fluctuates from year to year
• Recession
– Economic contraction
– Period of declining real
incomes and rising “You’re fired.
unemployment Pass it on.”
• Depression
– Severe recession
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 2
posted to a publicly accessible website, in whole or in part.
Short-Run Economic Fluctuations, Part 4
• AD-AS model
– Model of aggregate demand (AD) and
aggregate supply (AS)
– Most economists use it to explain short-
run fluctuations in economic activity
• Around its long-run trend
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 3
posted to a publicly accessible website, in whole or in part.
Short-Run Economic Fluctuations, Part 5
• Aggregate-demand curve
– Shows the quantity of goods and services
– That households, firms, the government,
and customers abroad
– Want to buy at each price level
– Downward sloping
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 4
posted to a publicly accessible website, in whole or in part.
Short-Run Economic Fluctuations, Part 6
• Aggregate-supply curve
– Shows the quantity of goods and services
– That firms choose to produce and sell
– At each price level
– Upward sloping
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 5
posted to a publicly accessible website, in whole or in part.
Figure 2 Aggregate Demand and Aggregate Supply
Economists use the model of aggregate demand and aggregate supply to analyze economic
fluctuations. On the vertical axis is the overall level of prices. On the horizontal axis is the
economy’s total output of goods and services.
Output and the price level adjust to the point at which the aggregate-supply and aggregate-
demand curves intersect.
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part. 6
The Aggregate-Demand Curve, Part 1
Y = C + I + G + NX
• Three effects explain why AD curve
slopes downward:
– Wealth effect (C )
– Interest-rate effect (I)
– Exchange-rate effect (NX)
• Assumption: government spending (G)
– Fixed by policy
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 7
posted to a publicly accessible website, in whole or in part.
The Aggregate-Demand Curve, Part 2
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 8
posted to a publicly accessible website, in whole or in part.
The Aggregate-Demand Curve, Part 3
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 9
posted to a publicly accessible website, in whole or in part.
The Aggregate-Demand Curve, Part 4
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 10
posted to a publicly accessible website, in whole or in part.
The Aggregate-Demand Curve, Part 5
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 11
posted to a publicly accessible website, in whole or in part.
Figure 3 The Aggregate-Demand Curve
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part. 12
The Aggregate-Demand Curve, Part 7
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 13
posted to a publicly accessible website, in whole or in part.
The Aggregate-Demand Curve, Part 8
• Changes in consumption, C
– Events that change how much people
want to consume at a given price level
• Changes in taxes, wealth
– Increase in consumer spending
• Aggregate-demand curve: shift right
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 14
posted to a publicly accessible website, in whole or in part.
The Aggregate-Demand Curve, Part 9
• Changes in investment, I
– Events that change how much firms want
to invest at a given price level
• Better technology
• Tax policy
• Money supply
– Increase in investment
• Aggregate-demand curve: shift right
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 15
posted to a publicly accessible website, in whole or in part.
The Aggregate-Demand Curve, Part 10
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 16
posted to a publicly accessible website, in whole or in part.
The Aggregate-Demand Curve, Part 11
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 17
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 1
• Long run aggregate-supply curve is
vertical, LRAS
– Price level does not affect the long-run
determinants of GDP:
• Supplies of labor, capital, and natural
resources
• Available technology
• Short run
– Aggregate-supply curve is upward sloping
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 18
posted to a publicly accessible website, in whole or in part.
Figure 4 The Long-Run Aggregate-Supply Curve
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part. 19
The Aggregate-Supply Curve, Part 2
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 20
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 3
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 21
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 4
• Changes in labor
– Quantity of labor – increases
• Aggregate-supply curve: shifts right
– Natural rate of unemployment – increases
• Aggregate-supply curve: shifts left
• Changes in capital
– Capital stock – increase
• Aggregate-supply curve: shifts right
– Physical and human capital
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 22
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 5
• Changes in natural resources
– New discovery of natural resource
• Aggregate-supply curve: shifts right
– Weather
– Availability of natural resources
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 23
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 6
• Changes in technology
– New technology, for given labor, capital
and natural resources
• Aggregate-supply curve: shifts right
– International trade
– Government regulation
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 24
posted to a publicly accessible website, in whole or in part.
Long-Run Growth and Inflation
• Long run: both AD and LRAS curves shift
– Continual shifts of LRAS curve to right
• Technological progress
– AD curve shifts to right
• Monetary policy
• The Fed increases money supply over time
– Result:
• Continuing growth in output
• Continuing inflation
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 25
posted to a publicly accessible website, in whole or in part.
Figure 5 Long-Run Growth and Inflation in the Model of
Aggregate Demand and Aggregate Supply
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part. 26
The Aggregate-Supply Curve, Part 7
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 27
posted to a publicly accessible website, in whole or in part.
Figure 6 The Short-Run Aggregate-Supply Curve
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part. 28
The Aggregate-Supply Curve, Part 8
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 29
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 9
• Sticky-wage theory
– Nominal wages - slow to adjust to changing
economic conditions
• Long-term contracts: workers and firms
• Slowly changing social norms
• Notions of fairness - influence wage setting
– Nominal wages - based on expected prices
• Don’t respond immediately when actual price level –
different from what was expected
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 30
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 10
• Sticky-wage theory
– If price level < expected
• Firms – incentive to produce less output
– If price level > expected
• Firms – incentive to produce more output
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 31
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 13
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 32
posted to a publicly accessible website, in whole or in part.
The Aggregate-Supply Curve, Part 14
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 33
posted to a publicly accessible website, in whole or in part.
Causes of Economic Fluctuations, Part 1
• Assumption
– Economy begins in long-run equilibrium
• Long-run equilibrium:
– Intersection of AD and LRAS curves
• Natural level of output
• Actual price level
– Intersection of AD and short-run AS curve
• Expected price level = Actual price level
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 34
posted to a publicly accessible website, in whole or in part.
Figure 7 The Long-Run Equilibrium
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part. 35
Causes of Economic Fluctuations, Part 2
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 36
posted to a publicly accessible website, in whole or in part.
Figure 8 A Contraction in Aggregate Demand
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part. 37
Causes of Economic Fluctuations, Part 3
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 38
posted to a publicly accessible website, in whole or in part.
Figure 10 An Adverse Shift in Aggregate Supply
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part. 39
Causes of Economic Fluctuations, Part 4
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or 40
posted to a publicly accessible website, in whole or in part.