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) Planned aggregate expenditure (PAE) PAE = C + I p + G + NX 45 o 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 Nominal interest rate (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. Real interest rate set by Fed, r MPR Inflation 

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

8/37 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) ADAD Inflation (  )

9/37 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, r 1, Y 1  Point A on AD curve.  Now inflation increases to  2  Fed increases real interest rate from r 1 to r 2.  The rise in real interest rate causes planned spending and output decreases from Y 1.  PAE shifts down.  Point B on AD curve. Inflation (  ) Output (Y) 11 A Y1Y1 AD 22 B Y2Y2 Inflation (  ) Real interest rate (r) r1r1 A 11 MPRF r2r2 B 22 Planned Spending (PAE) Output (Y) A Y = PAE PAE (r = r 1 ) Y1Y1 PAE (r = r 2 ) B Y2Y2

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) AD AD' Inflation (  )

12/37 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) ADAD A D' Inflation (  )

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

14/37 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 r 1  Normally, Fed follows a stable MPR.  Fed can tighten or ease monetary policy.  To shift MPR. Inflation (  ) Real interest rate (r) MPR r1r1 11

15/37 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？ Real interest rate (r) Inflation (  ) MPR A r1*r1* 1*1* r2*r2* MPR' B Output (Y) Inflation (  ) AD A 11 Y1Y1 AD' B Y2Y2

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 Inflation (  ) Output (Y) Aggregate Supply (AS) 22 Y1Y1 B Y2Y2 33 C Y* 1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

22/37 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 fulfillment  What 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.

23/37 Expected Inflation : 通貨膨脹預期的自我實現 Low Inflation Low Expected Inflation Slow Increase in Wages and Production Costs

24/37 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.

26/37 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  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  這個推理和個體面的供給線和成本變化類似

27/37 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) and  Long-run aggregate supply (LRAS). Inflation (  ) Output (Y) Aggregate Demand (AD) Aggregate Supply (AS) Y* Long-Run Aggregate Supply (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. Inflation (  ) Output (Y) AD AS 1 Y* LRAS Y1Y1 1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 inflation Expected inflation will increase.  This causes AS1 to shift to AS 2  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. Inflation (  ) Output (Y) AD AS 1 Y* LRAS Y1Y1 AS 2 11 A 2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 AS 2  Actual inflation falls (from  1 to  2 ). Inflation (  ) Output (Y) AD AS 1 Y* LRAS Y1Y1 11 B 22 AS 2

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) Inflation (  ) AD LRAS 2 Y2Y2 22 11 LRAS 1 Y1Y1

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. Inflation (  ) Output (Y) AD 1 AS 1 Y* AS 3 11 33 Y2Y2 22 LRAS 1 LRAS 2 AS 2

37/37 InflationInflation ShiftsShifts Exogenous Spending MPRF Shift ShiftsShifts Expected Inflation Inflation Shock Short-RunShort-RunLong-RunLong-Run Aggregate Demand Aggregate Supply EquilibriumEquilibrium Self-Correcting Economy LRASLRAS ASAS Movement Along