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Department
Management and Organizational Studies
Course
Management and Organizational Studies 2275A/B
Professor
Henry Meredith
Semester
Winter

Description
Chapter 26 Aggregate Supply and Aggregate Demand Aggregate Supply ▯ Long-run aggregate supply is the 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 employment. o The quantity of real GDP supplied is the total quantity of goods and services, valued in constant dollars, that firms plan to produce during a given time period. ▯ Potential GDP is the quantity of GDP at full employment. ▯ So the long-run aggregate supply curve is the relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDP. ▯ The figure shows the long-run aggregate supply curveLAS, which is vertical at potential GDP. ▯ A movement along the LAS curve, means that two sets of prices are changing: o The price level o The money wage rate and other resource prices ▯ Because both the price level and factor prices change, the real factor pricesremain constant. ▯ For example, the real wage is constant. ▯ The real wage rate remains at the level that achieves full employment of labour. ▯ The short-run aggregate supply curve is the relationship between the quantity of real GDP supplied and the price level in the short run when the money wage rate, the prices of other resources, and potential GDP remain constant. ▯ The figure shows a short-run aggregate supply curve. ▯ The short-run aggregate supply curve (SAS) is upward sloping. ▯ At a price level of 100, the quantity of real GDP supplied is $900 billion. ▯ At a price level of 110, the quantity of real GDP supplied is $1,000 billion, which equals potential GDP. ▯ At a price level of 120, the quantity of real GDP supplied is $1,100 billion, which exceeds potential GDP. ▯ The SAS curve slopes upward because, when the price level rises with a constant money wage rate, the real wage falls. ▯ With a lower real wage, firms make a larger profit by producing a larger output. ▯ The figure shows the effect of price level changes on the LAS curve and the SAS curve. ▯ A rise in both the price level and the money wage rate that maintains full employment brings a movement along the LAS curve. ▯ The real wage rate remains constant. ▯ A rise in the price level at a constant money wage rate brings a change in employment and real GDP and a movement along the SAS curve. ▯ Long-run aggregate supply changes when potential GDP changes. ▯ And potential GDP changes for three reasons: o A change in the full-employment quantity of labour o A change in the quantity of capital o An advance in technology ▯ When potential GDP increases, both the LAS curve and the SAS curve shift rightward in the figure. ▯ When the money wage rate rises, the SAS curve shifts leftward but the LAS curve remains unchanged in the figure below. Aggregate Demand ▯ The quantity of real GDP demanded is the sum of real consumption expenditure, investment, government expenditures, and exports minus imports. ▯ 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 buy. ▯ These buying plans depend on many factors, the main ones being o The price level o Expectations o Fiscal policy and monetary policy o The world economy ▯ The relationship between the quantity of real GDP demanded and the price level is aggregate demand. ▯ The figure shows an aggregate demand curve. ▯ The AD curve slopes downward for two reasons: o Wealth effect o Substitution effects ▯ A change in any influence on spending plans other than the price level changes aggregate demand. ▯ These other influences are: o Expectations o Fiscal policy and monetary policy o The world economy ▯ Expectations about three factors have a large influence on spending plans and affect aggregate demand. ▯ They are: o Expectations about future income o Expectations about inflation o Expectations about profits ▯ Fiscal policy is the government’s attempt to influence the economy by setting and changing taxes, making transfer payments, and purchasing goods and services. ▯ Monetary policy consists of changes in interest rates and in the quantity of money in the economy. ▯ The main influences that the world economy has on aggregate demand are the foreign exchange rate and foreign income. ▯ The foreign exchange rate is the amount of a foreign currency that you can buy with a Canadian dollar.
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