Aggregate Demand 02/25/2014
Personal Consumption Expenditures (69% of US income)
Are the expenditures by households on goods and services produced in the United States and the rest of
Is expenditures on capital equipment and buildings by firms and expenditures on new homes by
households. Also, it included inventories.
Change in inventories, investments can get thrown off (Christmas decorations at Target)
Government purchases of goods and services (20%)
Are the purchases of goods and services by all levels of government.
Do not include transfer payments (Social Security)
New exports of goods and service (6%)
Are the value of exports minus the value of imports
The AggregateSupply and Aggregate Demand model improves our understanding of:
1. Growth of potential GDP
2. What’s going to happen to Inflation
3. Business cycle fluctuations (increase in GDP and decrease because of recession)
Peaked in 2007 and picked up in beginning in 2010
4. How changes in economic variables impact the overall economy.
Expectations about future incomes, inflation and profits influence buying plans today.
Slow down recovery from Inflation.
Fiscal Policy and Monetary Policy
Fiscal policy is the government’s economic influence by taxes, transfer payment and government
Monetary policy is the Fed’s efforts to impact the money in circulation and interest rates (and some
Exchange Rates (world economy)
This impacts whether we purchase domestic or foreign goods. Aggregate Supply 02/25/2014
Gross Domestic Product Aggregate Supply 02/25/2014
GDP and Income (Y) Formula:
Y = C + I +G +X OR
AD = C + G + I + X at a particular price level
Expenditures Equals Income
The location of AS depends on technology and resources
The availability of labor
The availability of capital
The availability of natural resources
The use of technology
Chinas growth 8%
US growth 2%, but our income is higher
Changes in AS and AD
Changes in Aggregate Supply occur when influences on production other than the price level change.
Changes in Aggregate Demand occur when influences on buying plan other than the price level changes
Federal Government are macro . Buyers and sellers are micro
Figuring Rate of Change
% change = (new base)/base x 100
Exam 1 = 100, Exam 2 = 110
% change = (110 – 100)/100 + 0.10 x 100
% change = 0.10 x 100 = 10%
% change, rate of change, rate of growth, etc.
GDP Growth Measurements
2013 GDP $16,80T
2012 GDP $16.24 Aggregate Supply 02/25/2014
Economic growth = (16.80 – 16.24) / 16.2
= 0.6 / 16.2
rGDP Growth Measurement
2012 rGDP = $15.37T
2013 rGDP = $15.77T
Economic growth = 15.77 – 15.47 / 15.47
= 0.3 / 15.47
Russia’s presence in Ukraine impacts prices.
rGDP growth adjusted to 2.4% for the 4 quarter of last year.
Reducing consumer expenditure and new exports.
Is the periodic but irregular upanddown movement of the total production and income or rGDP over time.
19912001 and 20012008: long period of growth following with a recession.
Business Cycle Patterns
There is no single explanation for the business cycle.
Just a historic pattern that occurred.
If prices go up during a growth period people jump on it and it comes back to haunt them when the
recession comes. (2007)
There is no consistent way to forecast the turning