III.  Real Goods Market

A.  Price and Output Fluctuations

1.  Aggregate supply

• Shows quantity of domestically produced goods and services that firms are willing and able to produce and sell at various average national price levels

a.  Aggregate supply curve

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• Keynesian range

- Real GDP low, unemployment high, excess capacity

- Increasing real GDP doesn't put pressure on prices, falling real GDP doesn't lead to lower prices

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• Classical range

- At full employment level of real GDP

- Short-term productive capacity reached

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• Judge location on AS curve by looking at unemployment rate, capacity utilization

b.  Shifts of the AS curve

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• Caused by:

(1)  Changes in technology and productivity

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(2)  Change in the price of inputs

Ex. - Oil, labor

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(3)  Change in exchange rate

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(4)  Climate, natural disasters, diseases

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(5)  Discovery of new resources and immigration

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(6)  Changes in business taxes

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2.  Aggregate demand

• Shows relationship between average national price level and the quantity of domestically produced goods and services that individuals are willing and able to produce

a.  Aggregate demand curve

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b.  Shifts of the AD curve

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• Caused by changes in factors that affect C, I, G, and NE

(1)  Consumption (C)

(a)  Wealth (W)

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(b)  Consumer indebtedness (ID)

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(c)  Real risk-free interest rate (R)

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(d)  Personal income taxes (T_P)

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(e)  Consumer expectations (ExC)

• Expected prices

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• Expected real GDP

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• Expected real risk-free interest rate

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(2)  Investment (I)

(a)  Technology (Te)

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(b)  Real risk-free interest rate (R)

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(c)  Business taxes (T_B)

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(d)  Business expectations (ExB)

• Expected prices

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• Expected real GDP

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• Expected real risk-free interest rate

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• Expected taxes

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(3)  Government spending (G)

• Discretionary spending (DS)

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(4)  Net exports (NE = EX - IM)

(a)  Exchange rate (ER)

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(b)  Relative prices (P / P*)

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(c)  Real risk-free interest rate (R)

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(d)  Foreign income (RGDP_F)

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(e)  Tariffs, quotas (TQ)

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3.  Macroeconomic equilibrium

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4.  Recessions

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5.  Inflation

a.  Demand-pull inflation

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• Short-run Phillips curve

- Shows relationship between inflation and unemployment

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-  Doesn't hold in the long run

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b.  Cost-push inflation

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