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1、CHAPTER 5AGGREGATE SUPPLY AND DEMANDChapter Outline The classical AS-curve The Keynesian AS-curve The price adjustment mechanism Frictional unemployment The quantity theory of money The AD-AS framework The effects of shifts in aggregate demand Supply-side economics Dynamic scoring Long-run shifts in
2、 aggregate demand and supply Changes from the Previous EditionA new Box 5-2 (former Box 6-2) has been inserted to distinguish between the very short run AS-curve (the horizontal Keynesian AS-curve) and the upward sloping, medium run AS-curve. Old Box 5-2 has become new Box 5-3. New Section 5-2 (form
3、er Section 6-1), which describes the price adjustment mechanism, also has been inserted. All following boxes and sections have been renumbered.Introduction of the MaterialIn this chapter, the AD-AS model is presented as a basic macroeconomic model for determining the output and price levels. The AS-
4、curve describes the quantity of goods and services firms are willing to supply at each price level. The AD-curve shows all possible combinations of the price and output level at which the goods and money sectors are simultaneously in equilibrium. Two special cases are examined: the classical AS-curv
5、e, representing the long run, and the Keynesian AS-curve, representing the very short run. The classical AS-curve is vertical, based on the assumption that labor markets work smoothly and always maintain an equilibrium at full employment. Here, a shift in aggregate demand has no effect on the level
6、of output but does lead to a change in the price level. The Keynesian AS-curve is horizontal, indicating that firms will supply whatever amount of goods is demanded at the existing price level. Wages remain constant, and therefore a change in aggregate demand changes the level of output, while the p
7、rice level remains unaffected. The classical case implies that the labor market is always in a full-employment equilibrium, although some frictional unemployment always exists as people switch jobs. The amount of unemployment that exists at full employment is called the natural rate of unemployment.
8、 Many economists estimate this rate to currently to be at around 5.2 percent for the United States, but an exact value has never been established. The corresponding full-employment level of output is called potential GDP. While potential GDP changes every year due to technological improvements, the
9、changes do not depend on the price level.While we can distinguish between a horizontal (short-run), a vertical (long-run), and an upward-sloping (medium-run) AS-curve, it is also possible to think of the AS-curve as rotating over time from horizontal to vertical. Similarly, it is possible to imagine
10、 a non-linear AS-curve that is almost horizontal in a deep recession and almost vertical at the full-employment level of output (see Figure 1 of Box 5-3). This implies that demand management can increase output without much effect on the price level in a recession, while it will not stimulate the ec
11、onomy much and instead lead to large price increases in periods of full employment. The AD-curve shows all combinations of the price level and output at which the goods and money sectors are simultaneously in equilibrium. The AD-curve shifts to the right (left) whenever expansionary (restrictive) fi
12、scal or monetary policies are employed. The text uses the quantity theory of money as a simple way to derive the AD-curve. More details about aggregate demand are given in later chapters. The key to understanding the AD-curve is to understand that a change in nominal money supply (a policy change) w
13、ill shift the AD-curve, while a change in real money supply caused by a change in the price level (the price adjustment) is a movement along the AD-curve. Chapter 5 also briefly discusses supply-side economics. Many supply-siders have argued that it is important to consider the principle of dynamic
14、scoring. Their argument is that a cut in income tax rates will increase economic growth, and therefore any initial increase in the budget deficit will be at least partially offset by increased tax collections later on. Figure 5-11 is used to show that a cut in income taxes will simultaneously shift
15、aggregate demand and aggregate supply to the right. While many economists favor some supply-side policies, few believe that a simple income tax cut will achieve the desired goal of increased output combined with a lower price level. This is because a tax cut will shift the AD-curve swiftly and by a
16、large amount, but potential GDP (the vertical AS-curve) will shift only in the long run and by a fairly small amount. Since the AS-curve is very flat in the very short run, we should first see a rise in GDP accompanied by no (or only small) increases in the price level. But since the long-run AS-curve is vertical, the economy will eventually settle at a new long-run equilibrium with a small increase in GDP and a much high
