Chapter 23Output and Prices in the Short Run.ppt

What do we mean by an exogenous increase or decrease in prices ? The Canadian price level (P) increases for some reason not explained as part of our macroeconomic story. Example - natural resource prices in world markets increase causing Canadian natural resources prices to rise and this feeds through to production costs and ultimately P (the general price level). Or - a new Gov’t safety regulation causes all prices to go up. * of 36 Copyright ? 2008 Pearson Education Canada Chapter 23 Output and Prices in the Short Run * In this chapter you will learn 1. why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. 3. the meaning of the aggregate supply (AS) curve and why it shifts when technology or factor prices change. 2. how to derive the aggregate demand (AD) curve and what causes it to shift. In this chapter you will learn 4. how to define macroeconomic equilibrium. 5. how aggregate demand and aggregate supply shocks affect real GDP and the price level. Exogenous Changes in the Price Level – what are they? 23.1 THE DEMAND SIDE OF THE ECONOMY Exogenous means ‘from outside the system’ – something not explained in our model (eg. G, interest rates, exchange rates, the weather) Endogenous means ‘from within our system’ – something explained in our model (eg. Y, AE, C, M) MFC2007MFC2007,MFC2007,MFC2007MFC2007MFC2007 * MFC2007MFC2007,MFC2007,MFC2007MFC2007MFC2007 Exogenous Changes in the Price Level – why do they matter? Changes in P affect the wealth of both private bondholders and private bond issuers - but there is no change in aggregate wealth of the private sector. BUT What about government debt? - Changes in P make the Gov’t debt worth less – this does affect the wealth of the private sector An increase in P reduces the real value of money holdings. A fall in P raises the real value of money holdings. MFC2007MFC2007,MFC2007,MFC2007MFC2007MFC2007 * An increase in P