1/37

Aggregate Demand and Aggregate Supply

總和需求與總和供給

2/37

Recall: Goods Market (Planned Aggregate Expenditure; Aggregate Demand)

Output (Y)Pla

nn

ed a

gg

rega

te e

xpe

ndi

ture

(P

AE

)

PAE = C + Ip + G + NX

45o

Y = PAE

Y*

這是實質模型，沒有價格

3/37

Recall: Money Market (Money Supply and Money Demand)

Money (M)

MD

E

MS

M

i

No

min

al in

tere

st r

ate

(i)

貨幣市場，貨幣供需

4/37

Monetary Policy Rule (MPR)央行心中應有一個法則，百姓會揣摩

The monetary policy rule ( 貨幣政策法則 ): the action a central bank takes in response to changes in the economy.

The Fed raises or lowers interest rate to respond to changes in inflation rate.

Re

al i

nte

rest

rat

e s

et b

y F

ed,

r

MPR

Inflation 0.01

0.02

0.03

0.04

0.05

0.06

0.02 0.03 0.04

5/37

Learning Objectives:1. Define the aggregate demand curve (AD; 總合需求線 ).

Explain why it slopes downward.Explain why it shifts.

2. Define the aggregate supply curve (AS; 總合供給線 ).Explain why it slopes upward.Explain why it shifts.

3. Show how aggregate supply and aggregate demand determine short-run output and inflation. ( 產出和物價 )Show how aggregate demand, aggregate supply, and the

long-run aggregate supply curve (LRAS; 長期總合供給線 ) determine long-run output and inflation.

這個模型有短期和長期的分別，請特別留意

6/37

Learning Objectives:

4. Analyze how the economy adjusts to expansionary and recessionary gaps. 缺口的調整方式Relate this to the idea of a self-correcting economy.經濟體自我調整的機制

5. Use the aggregate demand – aggregate supply model to study the sources of inflation in the short run and in the long run.短期和長期造成通貨膨脹的原因

7/37

Introduction:The Keynesian model assumes that producers meet demand at preset prices. 凱因斯是實

質模型，不談價格When firms produce what is demanded, PAE determines the GDP.

Output gaps can cause inflation to increase (if expansionary gap) or decrease (if recessionary gap).

The aggregate demand - aggregate supply (AD-AS) model studies both inflation and output. AD-AS 模型討論產出和物價

Effective for analyzing and tracing the effects of fiscal and monetary policies on the economy. 財政政策和貨幣政策

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The Aggregate Demand Curve:總需求曲線的推導

Aggregate demand (AD) is the total demand for goods and services in the economy.

Aggregate demand curve shows the relationship between short-run equilibrium output, Y, and the inflation rate, , holding all other factors constant.

AD curve is negative sloping because of central bank’s monetary policy rule:When inflation increases, the

Fed raises interest rates, which causes total planned spending to fall.

Output (Y)

AD

Infla

tion

()

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The Aggregate Demand Curve:

At all points along the AD curve, short-run equilibrium output equals total planned spending.

AD 線上短期均衡產出等於計畫支出At all points along the AD curve, both the goods market

( 商品市場 ) and the money market ( 貨幣市場 ) are in equilibrium.

經濟意義是： AD 線上兩個市場都達到均衡商品市場： Keynesian basic model

貨幣市場： Monetary policy rule

所以， AD 線段是由上述兩個市場推導出來

10/37

Initial conditions: 1, r1, Y1

Point A on AD curve. Now inflation increases to 2

Fed increases real interest rate from r1 to r2.

The rise in real interest rate causes planned spending and output decreases from Y1.

PAE shifts down. Point B on AD curve.

Infla

tion

()

Output (Y)

1 A

Y1

AD

2B

Y2

Inflation ()

Rea

l int

eres

t ra

te

(r)

r1

A

1

MPRF

r2

B

2

Pla

nned

Spe

ndin

g (P

AE

)

Output (Y)

A

Y = PAE

PAE (r = r1)

Y1

PAE (r = r2)

B

Y2

11/37

Shifts in Aggregate Demand Curve:AD 線段移動有兩個成因

At a given inflation rate, aggregate demand shifts when:(1) Exogenous changes ( 外生變動 ) in spending occur支出行為改變 . (Keynesian basic model)(2) Fed's monetary policy rule changes.央行的貨幣反應法則改變 (MPR 改變 )

Many factors other than output or the real interest rate would affect total spending. They are the so-called exogenous factors. 模型外的稱為外生，包括

Consumer wealth.Consumer confidence.New technology.Fiscal policy.Foreign demand for domestic goods. Output (Y)

ADAD'

Infla

tion

()

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1. Exogenous Changes in Spending:外生支出增加對於 AD 線的影響

Increase in consumer wealth would increase the aggregate demand.Consumer wealth increases.

Consumption increases.

PAE curve shifts up.Y increases for each

given level of .Aggregate demand

curve shift to the right.三個圖形的推導

Output (Y)

AD

AD'

Infla

tion

()

13/37

Exogenous Changes in Spending:C, I, G, NX, 任一項目帶來的變動效果

Decrease in consumer confidence may lead firms to decrease their planned investment. 消費者信心下降，投資減少 (I)

New technology would lead firms to increase their planned investment. 　科技帶動新投資 (I)

Expansionary fiscal policy government purchases increase or income taxation reduction total planned spending increases. 　政府支出增加 (G)

Contractionary fiscal policy government purchases decrease or income tax rate increases total planned spending decreases. 政府支出減少

淨出口 (NX) 增加，或淨出口減少

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2. Central Bank’s Monetary Policy Rule Changes:央行貨幣政策法則改變對 AD 的影響

Central bank’s monetary policy rule describes how central banks set the real interest rate at each level of inflation.Suppose the Fed's long-run targets are 1 and r1

Normally, Fed follows a stable MPR.

Fed can tighten or ease monetary policy.To shift MPR.

Inflation ()

Rea

l int

eres

t ra

te

(r) MPR

r1

1

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Tightening Monetary Policy ( 緊縮貨幣政策 ):

Tightening monetary: a situation where a central bank lowers its long-run inflation target. 通膨目標下降

Tighter monetary policy results in each interest rate, r, being associated with a lower rate of inflation.A leftward (or upward) shift of the MPR. MPR 往上移

動在給定的通貨膨脹水準之下，實質利率上升， AD 線往

左移動如果是寬鬆的貨幣政策，上述的變動方向相反請確定可以由圖形推導上述結論

16/37

How Tightening and Easing Monetary Policy Affect the AD Curve?

貨幣政策的改變如何造成 AD 線段移動？

Rea

l int

eres

t ra

te (

r)

Inflation ()

MPR

Ar1*

1*

r2*

MPR'

B

Output (Y)

Infla

tion

()

AD

A1

Y1

AD'

B

Y2

17/37

Inflation and Aggregate Supply:Aggregate supply curve (AS) shows the relationship

between the short-run equilibrium Y, and the inflation rate, , given current inflation expectations and holding all other factors constant.

AS線段說明物價膨脹和短期均衡 Y的關係The level of short-run equilibrium output may happen

to equal the long-run equilibrium output, or potential output Y*. But that is not necessary case.

Three cases: No output gap, Expansionary gap, and Recessionary gap.

三種可能狀態：膨脹缺口，緊縮缺口，正常

18/37

AD 線段的斜率什麼情況下會改變

兩種可能導致 AD 線段斜率改變1. 邊際消費傾向改變 (K-AD 線斜律改變 )

2. 貨幣政策的態度改變 (MPR 斜律改變 )

請用圖形推導並說明其經濟意義

19/37

Aggregate Supply: 總供給曲線Aggregate supply curve is positive slope because of the

relation between actual inflation and output gap.When output is below potential (recession; Y < Y*):

firms have incentives to cut their prices so that they can sell more.

price level falls. 衰退缺口時，物價低 actual inflation is below expected inflation.

When output is above potential (expansion; Y > Y*): the quantity demanded exceeds the quantity supplied. firms have incentives to raise their prices. price level increases. 膨脹缺口時，物價高 actual inflation is above expected inflation.

No output gap: firms are satisfied that their sales equal their sustainable production. firms have no incentives to increase or reduce price. inflation is stable. 沒有缺口時，物價持平

20/37

Aggregate Supply Curve:Movement along the AS curve is related to

actual inflation and output gaps.三種狀態下的物價

Infla

tion

()

Output (Y)

AggregateSupply (AS)

2

Y1

B

Y2

3C

Y*

1

A

21/37

Inflation Inertia 通膨慣性 ; 通膨僵固性 :

In industrial economies, inflation tends to be inertial for two reasons: 通膨慣性的兩個成因1. Inflation expectations. 　預期心理2. Long-term wage and price contracts. 　長期契約

因為通貨膨脹的慣性，可能有良性循環 (virtuous circle) ，也可能有惡性循環 (vicious circle)

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1. Inflation Expectations: 通膨預期Both sellers and buyers take into account the inflation

they expect to prevail in the next year. Today‘s expectations of future inflation rate determine the future inflation rate. 今天的預期，未來會實現

The higher the expected rate of inflation, the more nominal wages and the cost of other inputs will increase.

預期心理帶來通貨膨脹的自我實現 self fulfillmentWhat determines inflation expectations? Expectations are influenced by recent experience.

If inflation is low and stable, people expect that to continue. 預期建立在過去的經驗，正向相關

Volatile inflation leads to volatile expectations.Low and stable inflation inflation creates a virtuous circle

( 良性循環 ) that keeps inflation low.

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Expected Inflation :通貨膨脹預期的自我實現

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2. Long-Term Wage and Price Contracts:長期契約

Long-term contracts reduce the cost of negotiations between buyers and sellers.

Labor contracts may be multi-year agreements.Long-term contracts serve to build in ( 內建 ) wage and

price increases that depend on inflation expectations at the time the contracts were signed.

如果長期契約加入通膨調整預期，物價變動自動帶來工資調整，互相影響

In the absence of external shocks, inflation tends to be stable over time.

25/37

Shifts in the AS Curve:AS 曲線的移動

Two factors that shift the AS curve:1. Inflation expectations. 通膨預期2. Inflation shocks. 通膨衝擊

1. If wages and prices rise faster than firms and workers thought.

Actual inflation exceeds expectations. Expected inflation will increase.

AS curve shifts to the left (upward).At each level of output,

inflation is higher.

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Inflation Shocks: 通貨膨脹衝擊2. Adverse inflation shock: An inflation shock that causes an

increase in inflation, like 1973 oil price crisis.OPEC dramatically cut its supplies of crude oil in 1973; price of

oil quadrupled (4 倍 ).Food shortages occurred at the same time.Sharp increase in inflation in 1974.

An adverse inflation shock shifts the aggregate supply curve to the left (upward). 負面的衝擊造成 AS 左移

Favorable inflation shock : An inflation shock that reduces inflation.

A favorable inflation shock shifts the aggregate supply curve to the right. 正面的衝擊造成 AS 右移Like oil price decreased in 1986.

這個推理和個體面的供給線和成本變化類似

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Long-Run Aggregate Supply (LRAS) and AD: 長期均衡

In the long-run, Actual output equals potential output (Y = Y*).Actual inflation equals expected inflation and the central

bank’s long-run inflation target. In the long-run, wage rates increase at exactly the same

rate as the overall price level because the price-level increase is fully anticipated.

The vertical line (LRAS) the level of potential output Y*.

28/37

Long-Run Equilibrium: 長期均衡Graphically, Long-run equilibrium occurs at the

intersection of:Aggregate demand (AD)Aggregate supply (AS) andLong-run aggregate supply (LRAS).

Infla

tion

()

Output (Y)

AggregateDemand (AD)

AggregateSupply (AS)

Y*

Long-Run AggregateSupply (LRAS)

29/37

Short-Run Equilibrium: 短期均衡The economy does not have to be in long-run at every point

in time. 長短期均衡不一定要都在一起Short-run equilibrium occurs when there is either an

expansionary gap or a recessionary gap. 在缺口處短期均衡AD and AS curves can

intersect at levels that above or below the potential level Y*.

Ex: point A in the graph.Short-run equilibrium is

temporary.

Infla

tion

()

Output (Y)

AD

AS1

Y*

LRAS

Y1

1

A

30/37

An Expansionary Gap:膨脹缺口時如何回復均衡

Initial aggregate supply: AS1

Actual output: Y1, potential output Y2, and actual inflation 1.

Initial equilibrium: A.

膨脹缺口，物價上升Why AS shifts? Changes in workers’ and firms’

expectation of inflationExpected inflation will increase.

This causes AS1 to shift to AS2

Actual inflation increases (from 1 to 2).

As inflation rises, the Fed increases interest rates.

Consumption and planned investment spending decrease, and planned aggregate expenditures falls along the AD curve.

Infla

tion

()

Output (Y)

AD

AS1

Y*

LRAS

Y1

AS2

1A

2

31/37

A Recessionary Gap:衰退缺口時如何回復均衡

Initial aggregate supply: AS1

Actual output: Y1, potential output Y2, and actual inflation 1.

Initial equilibrium:B.Recessionary gap: output is

below potential output.

Expected inflation will decrease (from 1 to 2).

Makes AS1 to shift to AS2

Actual inflation falls (from 1 to 2).

Infla

tion

()

Output (Y)

AD

AS1

Y*

LRAS

Y1

1

B

2

AS2

32/37

Self-Correcting Mechanism ( 自我修正機制 ):

Given enough time (long-run), output gaps disappear without any changes in monetary or fiscal policies.

By AD-LRAS model, expansionary gaps are eliminated by raising inflation, while recessionary gaps are eliminated by decreasing inflation. 長期都會自動回復均衡 , 古典學派想法

The so-called self-correcting mechanism. 自我修正機制Different from Keynesian model, which concentrates on the

short-run; no price adjustments.凱因斯模型沒有價格調整，因為他們專注於短期現象

Since the economy can self-correct, do we need monetary and fiscal policies? 既然自我修正，為何需要政策？

Whether the stabilization policies are needed depends on the speed of the self-correction process. 是否需要政策，重點在於調整速度的快慢

33/37

Self-Correcting Mechanism: (自我修正機制 ):

If self-correction takes place very slowly, monetary or fiscal policies can help to stabilize output or spending.

如果自我修正的速度太慢，就需要穩定政策The less (more) rapid the self-correction process, the

more (less) need for active monetary or fiscal policies to eliminate output gaps.When the economy faces a large output gaps, e.g. a

very high unemployment, fiscal and monetary policy are more likely to useful to eliminate the gap.

如果缺口很大，政策的需要也愈急迫

34/37

Shocks to Potential Output:可能產出的衝擊

A positive shock to potential output causes the long-run aggregate supply (LRAS) curve to shift to the right.

正向的衝擊帶來後果Opens a recessionary gap in the short-run and

decreases inflation rate.In the long-run, output is

higher and inflation is

lower than initial.

有沒有正向衝擊的例子？有沒有負向衝擊的例子？

Output (Y)

Infla

tion

()

AD

LRAS2

Y2

2

1

LRAS1

Y1

35/37

Shocks to Potential Output:可能產出的衝擊

A positive shock to potential output causes the long-run aggregate supply (LRAS) curve to shift to the right.Opens a recessionary gap in the short-run and

decreases inflation rate.In the long-run, output is higher and inflation is lower

than initial.Greenspan in 2000: “American economy was

experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at pace not seen in generations…”

36/37

Shocks to Potential Output:可能產出的衝擊：負面衝擊的時候

Question: What if an rise in oil prices both creates an (adverse) inflationary shock and reduces potential output?

Assume: Adverse inflation shock makes AS move to AS2.

Recall: expansionary gap leads to high inflation.

Infla

tion

()

Output (Y)

AD1

AS1

Y*

AS3

1

3

Y2

2

LRAS1LRAS2

AS2

37/37

InflationInflation

ShiftsShifts

Exogenous Exogenous SpendingSpending

MPRF ShiftMPRF Shift

ShiftsShifts

Expected Expected InflationInflation

Inflation Inflation ShockShock

Short-RunShort-RunLong-RunLong-Run

Aggregate Aggregate DemandDemand

Aggregate Aggregate SupplySupply

EquilibriumEquilibrium

Self-Correcting EconomySelf-Correcting Economy

LRASLRAS

ASAS

Movement Movement AlongAlong