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Macroeconomic Notes Chp 26 and 27(VERY THOROUGH)

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Economics 1022A/B
Lanfeng Yu

Macroeconomics Notes Chapters 26 and 27Chapter 26Aggregate Supply and Aggregate DemandQuantity Supplied and SupplyQuantity of Real GDP supplied The total quantity of goods and services valued in constant base year dollars that firms plan to produce during a given periodo The quantity depends on the quantity of labour human and physical employed and the state of technology o At any given time the quantity of capital state of technology and population are fixed o The quantity of labour is notit depends on decisions made by households and firms o The labour market can be in any one of three statesFull employmentAbove full employmentBelow full employment At full employment the quantity of real GDP supplied is potential GDP which depends on the full employment quantity of labouro Over the business cycle employment fluctuates around full employment and the quantity of real GDP supplied fluctuates around potential GDPAggregate Supply The relationship between the quantity of real GDP supplied and the price level This relationship is different in the long run than in the short runLongRun Aggregate SupplyThe relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to achieve full employmentQuantity of Real GDP supplied at full employmentpotential GDP o This quantity is the same regardless of the price levelAlong the long run aggregate supply curve as the price level changes the money wage rate also changesso the real wage rate is constant and real GDP remains at potential GDPVertical LinePotential GDP is independent of the price levelo Price level and money wage rate change by the same percentagethe real wage rate remains constant ShortRun Aggregate SupplyThe relationship between the quantity of real GDP supplied and the price levelwhen the money wage rate the prices of other resources and potential GDP remain constantWith a given wage rate there is one price level at which the real wage rate is at its full employment equilibrium level o At this price level the quantity of real GDP supplied equals potential GDP and the SAS curve intersects the LAS curve Changes in Aggregate SupplyAggregate supply changes when an influence on production plans other than the price level changes including o A change in potential GDP o A change in the money wage rate and other factor prices Changes in Potential GDPWhen potential GDP changes aggregate supply changes An increase in potential GDP increases both longrun and shortrun supplyThe two supply curves shift by the same amount only if the fullemployment price level remains constant Potential GDP can increase for any of 3 reasons o An increase in the fullemployment quantity of labour o An increase in the quantity of capital o An advance in technologyChanges in the Money Wage Rate and Other FactorsWhen the money wage rate or the money price of any other factor of production such as oil changes shortrun aggregate supply changes but longrun aggregate supply does not changeA rise in the money wage rate decreases shortrun aggregate supply and shifts the shortrun aggregate supply curve leftward because it increases firms costs o With increased costs the quantity that firms are willing to provide at each level decreasesA change in the money wage rate brings an equal percentage change in the price level hence no change in the longrun aggregate supply curve no change in relative pricesWhy does the Money Wage Rate changeThe money wage rate changes for two reasons o Departure from full employment o Expectations about inflationUnemployment above the natural rate puts downward pressure on the money wage rate and unemployment below the natural rate puts upward pressure on the money wage rateAn expected rise in the inflation rate makes the money wage rate rise faster and an expected fall in the inflation rate slows the rate at which the money wage rate rises Aggregate DemandThe quantity of real GDP demanded is the sum of real consumption expenditure investment government expenditure and exports minus imports o YCIGXM The quantity of real GDP demanded is the total amount of final goods and services produced in Canada that people businesses governments and foreigners plan to buyThe buying plans depend on many factors some of the main ones are o The price level o Expectations o Fiscal Policy and Monetary Policy o The world economyThe Aggregate Demand CurveAggregate Demand The relationship between the quantity of real GDP demanded and the price level o The higher the price level the smaller is the quantity of real GDP demandedAggregate demand curve slopes downward for two reasons o Wealth Effect o Income EffectWealth Effect When the price level rises but other things remain the same real wealth decreases
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