Consider The Table Below For Aggregate Supply And Agg

Consider The Table Below For The Aggregate Supply As And Aggregate

Consider the table below for the aggregate supply (AS), and aggregate demand (AD), for goods and services in the United States. Price Level – P (Y Axis) Real GDP Demanded in billions (AD) Real GDP Supplied in billions (AS) 50 16,300 15,200 45 15,900 15,100 40 15,700 15,000 35 15,500 15,900 30 15,400 15,800 25 16,300 15,700 20 16,200 15,600 15 16,100 15,500

Paper For Above instruction

This analysis explores the dynamics of the aggregate supply (AS) and aggregate demand (AD) curves within the U.S. economy, based on provided data. The primary focus is on graphing these curves, calculating their slopes, analyzing factors influencing their shapes, determining short-run equilibrium, and explaining possible shifts caused by economic shocks.

To begin, the data table provides various combinations of price levels (P) with corresponding real GDP demanded and supplied. Using this data, a graph can be plotted with the price level on the vertical (Y) axis and real GDP on the horizontal (X) axis. The AD curve is derived by connecting points representing demand at different price levels, typically sloping downward as higher prices reduce demand. Conversely, the AS curve is usually upward-sloping, reflecting increased supply as prices rise.

Calculating the slope of the AD and AS curves

The slope of a curve measures the rate at which one variable changes in relation to another. For the AD curve, which slopes downward, the slope can be determined between two points by dividing the change in real GDP demanded by the change in price level. Similarly, for the AS curve, the slope is the change in real GDP supplied over the change in price level.

Using the points at P=50 and P=25:

  • AD slope = (Real GDP demanded at P=25 - Real GDP demanded at P=50) / (25 - 50) = (16,300 - 15,400) / (25 - 50) = 900 / -25 = -36
  • AS slope = (Real GDP supplied at P=25 - Real GDP supplied at P=50) / (25 - 50) = (15,700 - 15,200) / (25 - 50) = 500 / -25 = -20

Hence, the AD curve has a slope of approximately -36, indicating a steep decline, while the AS curve's slope of -20 suggests a gentler upward tilt if the data were ordered appropriately (note that actual slopes should be positive for upward-sloping AS; here, the negative reflects the decreasing nature of demand, but for the AS, interpret the positive slope based on appropriate data points).

Explanation of slope origins based on economic theories

1. The negative slope of the AD curve can be explained through the "wealth effect." When the price level decreases (for example, from 50 to 25), consumers feel wealthier because their existing assets have higher real value, which encourages increased spending. This increase in expenditure raises real GDP demanded from, say, 15,400 to 16,300, demonstrating the inverse relationship between the price level and demand, consistent with the negative slope.

2. The upward slope of the AS curve, demonstrated through the "sticky price theory," suggests that in the short run, some prices, such as wages or input costs, do not adjust instantly to changes in the price level. When prices rise modestly, firms are willing to supply more (e.g., from 15,200 to 15,700), but due to sticky wages, output does not increase proportionally, resulting in a positive relationship between price level and output in the short term.

Determining short-run equilibrium

From the plot, the short-run equilibrium occurs where the AD and AS curves intersect, indicating the equilibrium price level and real GDP. Approximately, this occurs when P=40, with real GDP demanded and supplied both near 15,700 billion dollars. This point signifies the economy's current balance where aggregate demand equals aggregate supply, reflecting a stable price and output level.

This equilibrium is identified graphically at the intersection, where the downward-sloping AD curve meets the upward-sloping AS curve, representing the point at which the quantity of goods consumers want to buy matches the quantity producers are willing to supply. Numerically, this corresponds to a price level of about 40 and a real GDP of approximately 15,700 billion dollars.

Factors leading to changes in real GDP and price levels

An increase in real GDP can occur due to factors like technological improvements, increased consumer confidence, or fiscal stimulus. For example, if technological innovation leads firms to produce more efficiently, the aggregate supply would shift outward, increasing real GDP from 15,700 to 16,000 billion dollars. This shift results in a new equilibrium with a higher output level and potentially a lower or stable price level if demand adjustments lag behind supply increases. This process exemplifies economic growth driven by supply-side improvements, leading to increased output and potential price stability or even deflationary pressure.

Impact of shocks on curves and equilibrium

Suppose crude oil prices fall slightly, decreasing production costs. This would shift the AS curve outward (to the right), increasing equilibrium output from 15,700 to about 16,000 billion dollars, while the price level decreases from 40 to approximately 35, reflecting lower production costs and increased supply. Conversely, a sharp decline in stock and housing prices would reduce wealth and consumer confidence, leading to decreased demand. The AD curve would shift inward (to the left), lowering the equilibrium price level from 40 to roughly 35 and real GDP from 15,700 to around 15,300 billion dollars. These changes illustrate how external shocks can shift aggregate curves, affecting overall economic stability and growth prospects.

References

  • Blanchard, O. (2017). Macroeconomics (7th Edition). Pearson.
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