Aggregate Demand

By the end of this section:

1. Distinguish between demand and Aggregate Demand

2. Define and Illustrate Aggregate Demand

3. Define and describe the components of AD

4. Illustrate shifts of the AD curve

AND another overview of AD:

The determinants of AD or causes of shifts in the AD curve:

• Explain how the AD curve can be shifted by changes in consumption due to factors including changes in consumer confidence, interest rates, wealth, personal income taxes (and hence disposable income) and level of household indebtedness.

• Explain how the AD curve can be shifted by changes in investment due to factors including interest rates, business confidence, technology, business taxes and the level of corporate indebtedness.

• Explain how the AD curve can be shifted by changes in government spending due to factors including political and economic priorities.

• Explain how the AD curve can be shifted by changes in net exports due to factors including the income of trading partners, exchange rates and changes in the level of protectionism.

An example of how investment can help the economy of New Mexico (If MANY dif producers did what the meow wolf director did)

Part 3 – AD Shift Practice

Complete 2.2B – AD Shift Practice

Part 4 – Evaluation

Choose the ONE most important reason AD shifts for EACH category (C, G, I, X-M) and rationalize why you think it is the most important determinant.

Why do countries go through a recession? Lower AD!

How much credit should President Trump get for boosting the economy?

Practice AD Exam Questions :

1. Explain the differences between an increase in demand and an increase in aggregate demand

2. Explain the difference between the components of aggregate demand and the determinants of aggregate demand.

3. Explain three factors that could cause an increase the level of consumption in an economy.

4. Explain how a change in interest rates is likely to affect the level of investment in an economy.

Aggregate Supply Learning Targets:

1. Define Aggregate Supply (AS)

2. Define and illustrate short-run aggregate supply (SRAS)

3. Distinguish between SRAS and LRAS.

4. Distinguish between a "Keynesian" AS and a new classical LRAS.

5. Explain the sources of increases in the AS/LRAS.

Review of AS from Mr. Clifford:

Econ in the News:

Shifts in AS Find real stories, from anywhere in the world, about each of these following reasons

1. Students to find real stories, from anywhere in the world, about each of the reasons SRAS

shifts:

S-Side Shock

Changes in wage rates

Changes in costs of raw materials

Change in business taxes

Change in business subsidies

2. Then do the following 4 things:

a. write the name of the article

b. write the name of the news source of the article

c. DRAW a picture which summarizes the article

d. graph the appropriate AS shift.

3. Part 3 – Worksheets

Complete “2.2 Worksheets”

Intro to SRAS worksheet

AD and AS worksheet

Additional AD and AS Review Video:

Mr. Clifford's LRAS Review:

Another Review: Keynesian vs. Classical perspective:

Optional Additional Review of AD, AS, LRAS from Mr. Clifford:

Additional Review of AD/AS short run and long run

Shifting AS

Shifting the aggregate supply curve over the long term

• Explain, using the two models above, how factors leading to changes in the quantity and/or quality of factors of production (including improvements in efficiency, new technology, reductions in unemployment, and institutional changes) can shift the aggregate supply curve over the long term.

Classical vs. Keynesian AS

Practice Exam Questions on AS

1. Explain three possible causes of a decrease in the SRAS curve.

2. Explain the difference between the Keynesian AS and the new classical LRAS.

3. Explain the concept of potential economic growth.

Macroeconomic Equilibrium

Learning Targets:

1. Identify the short-run equilibrium level of national income/output

2. Illustrate equilibrium output in the short run

3. Explain and illustrate the monetarist/new classical perspective on long-run macroeconomic equilibrium

4. Explain and illustrate the Keynesian perspective on long-run macroeconomic equilibrium

5. Explain and illustrate that the difference between the equilibrium level national income and the full-employment level of national income will result in an inflationary or deflationary gap.

6. Discuss the difference between Keynesian and new classical economists in their view of macroeconomic equilibrium in the long run.

Review question: Why can the economy be stuck in a recessionary gap according to the Keynesian model? How does this differ from the neo-classical model?

Read Aggregate Demand and Aggregate Supply Equilibrium to Review

Exam Questions on Equilibrium:

1. Explain the difference between the equilibrium level of output and the full-employment level of output.

2. Explain the effects of an increase in LRAS on national income and the price level.

3. Explain, from a new classical perspective, how an increase in AD will affect an economy in the short run and the long run

Demand Management (Demand-side policies)

By the end of this section you should be able to:

1. Define fiscal policy

2. Explain the nature of a government budget.

3. Explain the goals of fiscal policy.

4. Explain how expansionary and contractionary fiscal policies work.

5. Discuss the effectiveness of fiscal policy

6. Discuss the potential costs of a high level of government debt.

HL: Explain and calculate the Keynesian multiplier

7. Define monetary policy

8. Explain the goals of monetary policy.

9. Explain how expansionary and contractionary monetary policies work

10. Discuss the effectiveness of monetary policy

HL: Explain the process of money creation by commercial banks

HL: Explain the tools of monetary policy.

HL: Explain the determination of the equilibrium nominal interest rate

11. Explain and calculate the difference between the nominal interest rate and the real interest rate.

Case Studies:

Find some examples in the news about countries in recession (past or present). Then:

1. Determine what caused the recession

2. Diagram it!

3. How was it resolved? Did the government get involved?

4. Graph the solution!

Then do the same thing for Inflation, Deflation and Stagflation.

Is inflation always bad? NO! Find examples of inflation that were simply a result of economic growth.

Is DEFLATION worse than inflation? IT DEPENDS!

Prepare to share with the class.

Example:

1. Determine what caused the recession (people being called to repay debt from credit and being unable to.)

2. Diagram it! (see board)

3. How was it resolved? Did the government get involved? (this is still a point of contention among economists. Some say that the recession was beginning to fix itself BUT the government under FDR did indeed intervene to create jobs and get money back into the economy.

4. Graph the solution! (see board)

The New Classical Perspective on the Real cause of the Great Depression and what SHOULD have been done:

HL Syllabus Requirements:

• • Explain, with reference to

  • the concepts of leakages (withdrawals) and injections, the nature and importance of the Keynesian multiplier.

  • Calculate the multiplier using either of the following formulae.

    • 1/(1 − MPC ) OR 1/ (MPS + MPT + MPM)

  • Use the multiplier to calculate the effect on GDP of a change in an injection in investment, government spending or exports.

  • Draw a Keynesian AD/AS diagram to show the impact of the multiplier.

Exam Questions

1. Explain how the government can use fiscal policy to alter the level of AD in the economy.

2. Explain how the government can use monetary policy to alter the level of AD in the economy.

3. Explain the difference between the nominal rate of interest and the real rate of interest.

HL: 1. Explain two factors that would cause the value of a country's Keynesian multiplier to increase.

HL: 2. Explain how commercial banks can create new money.

HL: 3. Explain two tools available to governments to control the money supply.

HL: 4. Explain what determines the equilibrium nominal interest rate.

Part b questions

1. Using real-world examples, discuss the effectiveness of fiscal policy.

2. Using real-world examples, discuss the effectiveness of monetary policy.

Supply-side Policies

Libertarian View:

Case Study: The UK and privatization:

Today?

The Great Depression: Did government intervention help? An alternative view:

Womenomics in Japan and Market based vs. Interventionist policies to increase AS.

Paper 3 Practice:

1. An economy has a marginal propensity to consume of 0.8. Calculate:

• a. it's marginal propensity to save, tax, and import

• b. Its multiplier

• c. the amount of injections that would be needed if national income is to rise by $10 million.

2. In a country, the marginal propensity to save is 0.1, the marginal rate of taxation is 0.3, and the marginal propensity to import is 0.1. How will the value of the multiplier change if the government lowers taxes, such that the marginal rate of taxation drops to 0.2?