JB's AP MACROECONOMICS

John Burkowski Jr.

Unit 3

National Income and Price Determination

#4 Aggregate Demand-Aggregate Supply (AD/AS)

Determinants of Aggregate Demand (AD):

C + I + G + Xn

Consumption/Consumer Spending (C)

- consumer income

- consumer wealth

- consumer confidence

- household borrowing

- consumer expectations

- personal income taxes

Investment Spending (I)

- acquisition / maintenance / operating costs

- business taxes

- technology

- inventory

- real interest rates

- business expectations

Government Spending (G)

- Expansionary Fiscal Policy

- increase government spending (and/or decrease taxes)

- Contractionary Fiscal Policy

- decrease government spending (and/or increase taxes)

Net Exports (Xn)/Exports - Imports (X-M)

- Relative Income

- Exchange Rates

- Foreign Consumer Tastes / Preferences

- Protectionism (tariffs, quotas)

Determinants of Short-Run Aggregate Supply (SRAS):

Input Costs / Production Costs

Wages

Market Power (Monopolies, Cartels)

Productivity

Technology

Producer Expectations

Government Subsidies

Business Taxes

Government Regulations

Availability of Resources / Inputs

Determinants of Long-Run Aggregate Supply (LRAS):

Permanent change in...

Land

- Changes in Quantity and/or Quality of Natural Resources

Labor

- Changes in Quality of Human Capital

Capital

- Changes in Capital Stock / Capital Formation
- Investment in Technology

Entrepreneurial Ability

- Investment in Education / Training

Review Formulas:

Consumption (C) and Saving (S)

Consumer Income↑ → C↑, S↓

Consumer Income↓ → C↓, S↑

Consumer Wealth↑ → C↑, S↓

Consumer Wealth↓ → C↓, S↑

Consumer Expectations↑ → C↑, S↓

Consumer Expectations↓ → C↓, S↑

Consumer Debt↑ → C↓, S↑

Consumer Debt↓ → C↑, S↓

Personal Income Taxes↑ → C↓, S↓

Personal Income Taxes↓ → C↑, S↑

Transfer Payments↑ → C↑, S↑

Transfer Payments↓ → C↓, S↓

Investment Spending/Demand (I)

Acquisition/Maintenance/Operating Costs↑ → I↓

Acquisition/Maintenance/Operating Costs↓ → I↑

Corporate Income / Business Taxes↑ → I↓

Corporate Income / Business Taxes↓ → I↑

Technology↑ → I↑

Technology↓ → I↓

Inventory↑ → I↓

Inventory↓ → I↑

Market Expectations↑ → I↑

Market Expectations↓ → I↓

Fiscal Policy

Expansionary Fiscal Policy (increase government spending, decrease taxes) → AD↑ → PL↑, Y↑

Contractionary Fiscal Policy (decrease government spending, increase taxes) → AD↓ → PL↓, Y↓

Net Exports (Xn)/Exports - Imports (X-M)

Foreign Consumer Tastes and Preferences↑ → Xn↑

Foreign Consumer Tastes and Preferences↓ → Xn↓

Foreign Income↑ → Xn↑

Foreign Income↓ → Xn↓

Appreciation of Dollar ($↑) → Xn↓

Depreciation of Dollar ($↓) → Xn↑

Tariffs↑ → M↓ → Xn↑

Tariffs↓ → M↑ → Xn↓

Aggregate Demand (AD)

C↑, I↑, G↑, Xn↑ → AD↑ → PL↑, Y↑ (Demand-Pull Inflation)

C↓, I↓, G↓, Xn↓ → AD↓ → PL↓, Y↓

Short-Run Aggregate Supply (SRAS)

SRAS↑ → PL↓, Y↑

SRAS↓ → PL↑, Y↓ (Cost-Push Inflation aka Stagflation)

Long-Run Aggregate Supply (LRAS)

Land↑, Labor↑, Capital↑, Entrepreneurial Ability↑ → LRAS↑

Land↓, Labor↓, Capital↓, Entrepreneurial Ability↓ → LRAS↓

#5 Loanable Funds

Determinants of Demand for Loanable Funds:

Consumer Borrowing

Investment Spending

Government Deficit Spending*

Determinants of Supply of Loanable Funds:

National Savings

Money Supply

Foreign Financial Investment/Capital Inflows and Outflows

Government Deficit Spending*

- Deficit spending can be applied to either the Supply of Loanable Funds or the Demand of Loanable Funds. Either way is correct as both result in the increase of real interest rates. In my course, I instruct you to apply deficit spending to the Demand of Loanable Funds. KEY IDEA: Increased deficit spending results in Crowding Out.

Review Formulas:

Demand for Loanable Funds

(borrowing↑; deficit spending↑) → Dlf↑ → r%↑, Qlf↑

(borrowing↓; deficit spending↓) → Dlf↓ → r%↓, Qlf↓

Supply of Loanable Funds

(savings↑; money supply↑) → Slf↑ → r%↓, Qlf↑

(savings↓; money supply↓) → Slf↓ → r%↑, Qlf↓