Principles of Macroeconomics ECON102 Week 1 Lecture Slides PDF

Principles to Macroeconomics ECON102 Part 3: Week 1 Lecture Priyanka Harrichurran: [email protected] SESSION 1 2  Principles of Macroeconomics...

Principles to Macroeconomics ECON102 Part 3: Week 1 Lecture Priyanka Harrichurran: [email protected] SESSION 1 2  Principles of Macroeconomics ECON102 Learning Objectives To understand: – Aggregate demand and aggregate supply – Macroeconomic equilibrium – Demand-pull and cost-push inflation Priyanka Harrichurran [email protected] 3  Principles of Macroeconomics ECON102 AD-AS Model The aggregate supply–aggregate demand (AS-AD) model explains how real GDP and the price level are determined and how they interact Priyanka Harrichurran [email protected] 4  Principles of Macroeconomics ECON102 Aggregate Supply Not the same thing! Recall from ECON101 Quantity Supplied and Supply The quantity of real GDP supplied is the total quantity of goods and services (valued in constant base-year rands) that firms plan to produce during a given period. Quantity supplied depends on: Not fixed o Quantity of labour employed o Quantity of capital (physical and human) Fixed at any given time – based on o State of technology past decisions Populations is also fixed Aggregate supply is the relationship between the quantity of real GDP supplied and the price level. Priyanka Harrichurran [email protected] 5  Principles of Macroeconomics ECON102 Aggregate Supply Short-run Aggregate Supply (SAS) Long-run Aggregate Supply (LRAS) Relationship between quantity of real GDP Relationship between quantity of real GDP supplied and price level when the money wage supplied and price level when the money wage rate, the prices of other resources and potential rate changes at the same rate as the price level to GDP remain constant. maintain full employment. ❖ In SR, the quantity of real GDP increases if the ❖ In LR, the quantity of real GDP supplied is equal price level increases, cp. to potential GDP ❖ SAS Curve is upward sloping. ❖ LRAS Curve is vertical at potential GDP Priyanka Harrichurran [email protected] 6  Principles of Macroeconomics ECON102 Aggregate Supply Changes in Aggregate Supply Aggregate The quantity supply of real changes GDP supplied when anisinfluence the total on quantity production of goods plans and other services than(valued the in constant price level changes. base-year rands) that firms plan to produce during a given period. Aggregate supply changes due to: o Changes in potential GDP o Changes in the money wage rate Priyanka Harrichurran [email protected] 7  Principles of Macroeconomics ECON102 Changes in Potential GDP Recall: What is potential GDP? An increase in potential GDP increases both long and short-run aggregate supply Potential GDP can increase for 3 reasons: ❑ An increase in the full-employment quantity of labour ❑ An increase in the quantity of capital ❑ An advance in technology An increase in potential GDP increases LRAS and SAS - shifts both curves to the right Priyanka Harrichurran [email protected] 8  Principles of Macroeconomics ECON102 1. Which of the following WILL NOT change potential GDP? a) Positive expectations about future income b) An improvement in human capital c) An increase in the stock of physical capital d) An increase in university throughput along with a greater number of higher learning institutions e) An advancement in technology Priyanka Harrichurran [email protected] 9  Principles of Macroeconomics ECON102 Changes in the Money Wage Rate SAS changes when the money wage rate (or the money price of any other factor of production such as oil) changes LRAS does not change! o Why? An increase in money wage does not change potential GDP An increase in the money wage rate decreases SAS – shifts SAS to left Priyanka Harrichurran [email protected] 10  Principles of Macroeconomics ECON102 2. A change in the money wage rate shifts a) the SAS curve but not the LAS curve b) neither the SAS nor the LAS curve c) both the SAS and LAS curves d) the LAS curve but not the SAS curve. Priyanka Harrichurran [email protected] 11  Principles of Macroeconomics ECON102 3. Which of the following will cause the short-run aggregate supply curve to shift to the right? a) An increase in the price level b) An increase in the government budget deficit c) A decrease in the price level d) A decrease in wages e) A decrease in productivity Priyanka Harrichurran [email protected] 12  Principles of Macroeconomics ECON102 Aggregate Demand Quantity of real GDP demanded - total amount of final goods and services produced in South Africa that people, businesses, governments and foreigners plan to buy. These planned expenditures 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 economy Priyanka Harrichurran [email protected] 13  Principles of Macroeconomics ECON102 Aggregate Demand The Aggregate Demand Curve Aggregate demand - the relationship between the quantity of real GDP demanded and the price level. The higher the price level, the smaller is the quantity of real GDP demanded, cp. AD is described by an aggregate demand schedule and aggregate demand curve The aggregate demand curve slopes downward for two reasons: o Wealth Effect ▪ When the price level rises but other things remain the same, real wealth decreases ▪ Individuals then  savings and  current consumption   AD o Substitution Effect ▪ When the price level rises and other things remain the same, interest rates rise ▪ Individuals then  savings and  current consumption   AD Priyanka Harrichurran [email protected] 14  Principles of Macroeconomics ECON102 Aggregate Demand The Aggregate Demand Curve When the price level increases the quantity of real GDP demanded decreases, cp. o Graphically shown as movement up along the AD curve Priyanka Harrichurran [email protected] 15  Principles of Macroeconomics ECON102 Changes in Aggregate Demand Aggregate demand changes when any factor that influences planned expenditure other than the price changes. Which factors cause aggregate demand changes? o Expectations o Fiscal policy o Monetary policy o The world economy When AD changes, the AD curve shifts Priyanka Harrichurran [email protected] 16  Principles of Macroeconomics ECON102 Changes in Aggregate Demand Priyanka Harrichurran [email protected] 17  Principles of Macroeconomics ECON102 4. Which of the following does NOT shift the aggregate demand curve? a) A decrease in taxes b) A decrease in the quantity of money c) An increase in the price level d) An increase in investment.. Priyanka Harrichurran [email protected] 18  Principles of Macroeconomics ECON102 5. Which of the following could have shifted aggregate demand from AD0 to AD1? a) the quantity of money increased. b) foreign incomes decreased. c) the government raised taxes. d) the price level fell. e) firms expected profit to fall in the future Priyanka Harrichurran [email protected] 19 SESSION 2 20  Principles of Macroeconomics ECON102 Explaining Macroeconomic Trends and Fluctuations Short-run Macro Equilibrium Long-run Macro Equilibrium Occurs when the quantity of real GDP demanded Occurs when real GDP equals potential GDP – i.e., equals the quantity of real GDP supplied when the economy is on its LRAS curve. ❖ Intersection of AD and SAS ❖ Intersection of AD and LRAS Money wage rate is fixed Money wage rate adjusts Priyanka Harrichurran [email protected] 21  Principles of Macroeconomics ECON102 What is the LR equilibrium price level? Priyanka Harrichurran [email protected] 22  Principles of Macroeconomics ECON102 Explaining Macroeconomic Trends and Fluctuations Economic Growth and Inflation in the AS–AD Model Priyanka Harrichurran [email protected] 23  Principles of Macroeconomics ECON102 Explaining Macroeconomic Trends and Fluctuations The Business Cycle in the AS–AD Model Priyanka Harrichurran [email protected] 24  Principles of Macroeconomics ECON102 6. In the figure, at the point where the AD curve intersects the SAS curve, a) the economy is in a recession b) the unemployment rate is zero c) potential GDP exceeds real GDP d) real GDP exceeds potential GDP Priyanka Harrichurran [email protected] 25  Principles of Macroeconomics ECON102 Explaining Macroeconomic Trends and Fluctuations Increase in Aggregate Demand SR: increase in AD shifts AD0 to AD1 → inflationary gap. LR: money wage  and SAS shifts leftwards →  price level and  real GDP to potential GDP. Priyanka Harrichurran [email protected] 26  Principles of Macroeconomics ECON102 Explaining Macroeconomic Trends and Fluctuations Decrease in Aggregate Supply Priyanka Harrichurran [email protected] 27 SESSION 3 28  Principles of Macroeconomics ECON102 Inflation Cycles Demand-pull Inflation Demand-pull inflation is inflation that starts because aggregate demand increases. Demand-pull inflation can be kicked off by any of the factors that change AD. o  AD →  price level and  real GDP o Then the money wage  and SAS shifts left o Price level  further and real GDP  A Demand-pull Inflation Spiral o AD must persistently increase - the only way it can do so is if the quantity of money persistently increases Priyanka Harrichurran [email protected] 29  Principles of Macroeconomics ECON102 Inflation Cycles Cost-push Inflation Cost-push Inflation is inflation that is kicked-off by an increase in costs. The two main sources of cost increases are: o An increase in the money wage rate o An increase in the money prices of raw materials The combination of a rising price level and decreasing real GDP is called stagflation Priyanka Harrichurran [email protected] 30  Principles of Macroeconomics ECON102 7. Which of the following may cause demand-pull inflation? a) Increased government expenditure b) Increased taxes c) Decrease in government expenditure d) Increase in costs of factors of production Priyanka Harrichurran [email protected] 31  Principles of Macroeconomics ECON102 8. Stagflation is defined as a period when real GDP ________ and the price level ________. a) increases; increases b) increases; decreases c) decreases; decreases d) is constant; rises rapidly e) decreases; increases Priyanka Harrichurran [email protected] 32  Principles of Macroeconomics ECON102 https://quizizz.co m/admin/quiz/64 ef1d3568395e527 2b5e099?source= quiz_share Priyanka Harrichurran [email protected]