In the 1930s, almost one-fourth of the U.S. labor force was unemployed.
Unemployed workers can't afford to buy things.
There was little or no demand for those goods and services.
More workers became unemployed as these factories closed.
Although not as severe as the Great Depression, the economy entered a very steep downturn in December of 2007.
There are different causes and characteristics of recessions.
There were huge failures of financial institutions during the Great Depression and the most recent recession.
Understanding why recessions occur is important to diagnose policies to cure them.
The short-run aggregate play in economic fluctuations is explained in page 222 from the Short Run to the Long Run, Consequences.
List the factors that affect MyLab Economics demand.
In the Great Depression, real GDP fell steeply as it grew below its potential.
Unemployment falls below its natural rate when GDP grows too rapidly.
There was a failure in coordination during the Great Depression.
If there had been more demand for their products, factories would have produced more output and hired more workers.
When prices have time to fully adjust to changes in demand, and when prices don't yet have time to fully adjust to changes in demand, economists begin to distinguish between real GDP in the long run and real GDP in the short run.
Economic coordination problems are more pronounced during the short run.
In the long run, economists think the economy will return to full employment, although economic policy may help it get there more quickly.
We studied economic growth and analyzed the economy at full employment.
The framework for analyzing the behavior of the economy in the long run, but not in the short run, was provided by those chapters.
An additional set of tools is needed to analyze both short- and long-run changes.
We discussed how adverse shocks can affect the economy.
The theory of real busi ness cycles focuses on how shocks to technology cause economic fluctuations.
We are looking at another approach to understanding economic fluctuations.
Keynes and many other economists focus on economic problems.
Normally, the price system coordinates what goes on in an economy.
The price system gives signals to firms as to who buys what, how much to produce, what resources to use, and from whom to buy.
If consumers decide to buy fresh fruit instead of chocolate, the price of fresh fruit will go up and the price of chocolate will go down.
There will be more fresh fruit and less chocolate because of these price signals.
On a day-to-day basis, the price system works silently, matching the desires of consumers with the output from producers.
The price system does not always work quickly.
If prices aren't adjusted quickly enough, producers and consumers won't get the signals they need to work together.
Coordination can break down if demand and supplies are not brought into equilibrium immediately.
Some prices are very flexible while others are not.
Auction prices for fresh fish, vegetables, and other food products are very flexible and adjust quickly.
Industrial commodities, such as steel rods or machine tools, are custom prices and tend to adjust slowly to changes in demand.
As shorthand, economists refer to slowly adjusting prices as "sticky prices", just like a door that won't open immediately but sometimes gets stuck.
The prices of steel rods and machine tools are input prices.
The price of labor is similar to other input prices.
Employers can't change wages during a given year when workers have long-term contracts.
Union workers, university professors, high-school teachers, and employees of state and local governments all have slow wages.
There are very few workers in the economy who have their wages change quickly.
Movie stars, athletes, and rock stars may be exceptions because of their popularity.
They are not like the typical worker in the economy.
Minimum wage laws protect unskilled, low wage workers from a decrease in their wages.
Wages are the biggest cost of doing business for most firms.
Firms' overall costs will be sticky if wages are sticky.
Firms' product prices will remain sticky.
The economy's ability to bring demand and supply into balance is hampered by sticky wages.
Firms that supply steel rods or other intermediate goods allow demand to determine the level of output in the short run.
Consider an automobile firm that buys material from a steelmaker on a regu lar basis.
The auto firm and the steel producer have been in business with one another for a long time and have an ongoing relationship.
Suppose the automobile company's cars become very popular.
The firm needs to increase production.
The steel company would meet the higher demand without raising its price to the automobile company.
The pro duction of steel is determined by the demand from automobile producers, not by price.
The firm would need less steel.
The steelmaker would not reduce its price under the agreement.
There are similar agreements between firms throughout the economy.
Firms will usually adjust production with small changes in prices in order to meet changes in demand for their products.
Workers are also "inputs" to production and what we have just illustrated applies to them.
If the automobile firm hires union workers under a contract that fixes their wages for a specific period, what would happen?
If the economy suddenly starts to improve, the automobile company will hire all the workers and possibly require some to work overtime.
The firm will lay off some workers if the economy doesn't grow in the next few years.
Wages will not change during the period of the contract.
Information from mail-order catalogues has been used by economists.
Many prices in the economy are slow to adjust.
Prices change over time.
The automobile company's car is popular for a long time.
The price of steel will be adjusted by the steel company and the automobile company.
Demand, not prices, determines output in the short run.
The period of time in which prices don't change very much.
There was a mixture of both large and smal changes when prices eventually changed.
We might expect prices to change more frequently during periods of high inflation.
The data from the Bureau of Labor Statistics for 1995 to 1997 was used by Mark Bils and Peter Klenow of the University of Rochester.
Half of goods' prices lasted less than 4.3 months, compared to the previous studies which found more frequent price changes.
A number of different approaches to egories of prices have been taken by some cat economists.
Retail prices are analyzed by price changes.
The Uni for tomatoes happened every 3 weeks.
The versity of Chicago looked at prices in consumer catalogs.
He looked at the prices of goods from L.L.
in coin-operated laundries.
There are related exercises 1.5, 1.7, and 1.8.
He found that the price was very high.
The aggregate demand and aggregate supply curves form an economic model that will allow us to study how output and prices are determined in both the short and long run.
The framework in which we can study the role the government can play in stabilizing the economy is provided by this economic model.
It is the demand for GDP by consumers, firms, the government, and the foreign sector.
Aggregate demand refers to the economy as a whole, not to individual goods or markets.
The total demand for GDP is plotted as a function of the price level.
The total quantity demanded for goods and services increases when the price level falls.
The components of aggregate demand, why the aggregate demand curve slopes downward, and the factors that can shift the curve are what we need to understand the aggre gate demand curve.
The aggregate demand curve plots the total demand for realGDp as a function of the price level.
The aggregate demand curve just describes the demand for total GDP at different price levels, so the four components are also the four parts of aggregate demand.
The aggregate demand curve will be shifted.
To understand the slope of the aggregate demand curve, we need to consider the effects of a change in the economy.
Let's take a look at the supply of money in the economy.
Think of the supply of money as the total amount of currency held by the public and the value of all deposits in savings and checking accounts.
The purchasing power of your money changes with the prices in the economy.
The real-nominal principle is shown in this example.
The real value of money or income is what matters to people.
The wealth effect, the interest rate effect and the international trade effect affect the aggregate demand curve.
The real value of money increases total goods and services when spending goes up because it leads to higher levels of wealth.
The real value of money is affected by the price level.
A lower price level will lead to lower interest rates.
Firms will find it cheaper to borrow money with lower interest rates.
Demand for goods in the economy will increase as a result of a con sequence.
Domestic goods produced in the home country will become cheaper relative to foreign goods if the price level is lowered.
If the price level in the United States falls, it will make U.S. goods cheaper than foreign goods.
If U.S. goods become cheaper than foreign goods, exports from the United States will increase.
Net exports will increase.
The aggregate demand curve is affected by three factors: the wealth effect, the interest rate effect, and the international trade effect.
Even though the price level hasn't changed, total demand for all the goods and services contained in real GDP has increased because of an increase in aggregate demand.
The curve is shifted to the right when demand increases.
Even though the price level hasn't changed, factors that decrease aggregate demand shift the curve to the left.
These shifts are caused by key factors.
In later chapters, we discuss each factor.
An increase in the supply of money in the economy will increase aggregate demand and shift the aggregate demand curve to the right.
Increased supply of money will lead to higher demand by both consumers and firms.
A higher supply of money will increase consumer wealth and demand for goods and services.
The aggregate demand curve will be shifted to the left if there is a decrease in the supply of money.
The aggregate demand curve will be shifted to the right by a decrease in taxes.
Even though the price level in the economy hasn't changed, lower taxes will increase the income available to households and increase their spending on goods and services.
The aggregate demand curve will be shifted to the left if taxes are increased.
The income available to households will be reduced by higher taxes.
An increase in government spending will increase aggregate demand and shift the aggregate demand curve to the right.
Increased government spending leads to an increase in total demand for goods and services because the government is a source of demand.
Government spending decreases will decrease aggre gate demand and shift the curve to the left.
Any change in demand from households, firms, or the foreign sector will change aggregate demand.
If the Chinese economy expands rapidly, demand for U.S. goods will increase.
Aggregate demand will increase if U.S. households decide to spend more.
Aggregate demand will increase if firms become optimistic about the future.
Firms will cut their investment spending if they become pessimistic.
Changes in aggregate demand that accompany changes in the price level are already included in the curve.
Our discussion is summarized in Figure 9.2 and Table 9.1.
Decreases in taxes, increases in government spending, and increases in the supply of money shift the aggregate demand curve to the right.
Increases in taxes, decreases in government spending, and decreases in the supply of money shift it to the left.
Any increase in demand will shift the curve to the right.
Decreases in taxes, increases in government spending, and an increase in the supply of money shift the aggregate demand curve to the right.
Let's take a closer look at the shift in the aggregate demand curve and see how far changes really make it shift.
The government could spend $10 billion more on goods and services.
The shift will be $10 billion.
John Maynard Keynes was an economist.
Keynes believed that as government spending increases and the aggregate demand curve shifts to the right, output will increase as well.
Increased output also means increased income for households, as firms pay households for their labor and for supplying other factors of production, as we saw with the circular flow in Chapter 5.
Aggregate demand will increase when households want to spend or consume part of their income.
The further shift in the aggregate demand curve is caused by the additional spend ing by consumers over and above what the government has already spent.
The idea of how the economy works is simple.
The government will invest $10 million in a federal court building.
The $10 million paid to a private construction firm increases total spending in the economy.
$10 million is paid to the construction workers and owners.
The owners and workers spend $6 million of their income on new cars, but it does not matter what they spend it on.
In order to meet the increased demand for new cars, automobile producers will expand their production and earn an additional $6 million in wages and profits.
They will spend part of the additional income on TVs.
The workers and owners who make TVs will spend part of their earnings.
To take a closer look at this process, we need to look more closely at the behavior of consumers and how their behavior helps to determine the level of aggregate demand.
Consumer spending depends on the level of income in the economy, according to economists.
Consumers want to purchase more goods and services when they have more money.
Spending that doesn't depend on the level of income is called autonomously spending.
All consumers, regardless of their current income, will have to purchase.
If a household gets some additional income, it will increase its consumption by a certain amount.
The household doesn't spend out of income, so it saves.