CHAPTER

13
Aggregate Demand, Aggregate Supply, and Inflation

Prepared by: Fernando Quijano and Yvonn Quijano

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

yst

The Aggregate Supply Curve

Aggregate supply is the total supply of all goods and services in the economy.....AS : keseluruhan penawaran barang dan jasa dalam perekonomian The aggregate supply (AS) curve is a graph that shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level.kurva AS : hubungan antara jumlah barang yang ditawarkan oleh semua perusahaan dan tingkat harga
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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The Aggregate Supply Curve: A Warning

The aggregate supply curve is not a market supply curve and it is not the simple sum of all the individual supply curves in the economybukan kurva supply pasar dan bukan
penjumlahan kurva supply individual
One reason is that firms do not simply respond to

market-determined prices, but they actually set prices. Price-setting firms do not have individual supply curves because these firms are choosing both output and price at the same time. We can add something that does not exist!...perusahaan memilih harga dan output secara bersamaan
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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The Aggregate Supply Curve: A Warning

Another reason is that when we draw a firms supply

curve, we assume that input prices are constant. If the overall price level is rising, there will be an increase in at least some input prices..diasumsikan P input konstan
The outputs of some firms are the inputs of other firms

output beberapa perusahaan merupakan input perusahaan lain

As wage rates and other input prices rise, the firms individual

supply curves are shifting, so we can not sum them to get an aggregate supply curve.upah dan harga input lain naik, supply perusahaan individual bergeser, sehingga tidak dapat dijumlahkan untuk mendapatkan kurva AS
yst

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

The Aggregate Supply Curve: A Warning

What does exist is a price/output response curvea curve that traces out the price decisions and output decisions of all the markets and firms in the economy under a given set of circumstances.kurva AS adalah
kurva respon harga/output : kurva keputusan harga dan output semua pasar dan perusahaan pada kondisi tertentu

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

yst

Aggregate Supply in the Short Run

In the short run, the aggregate supply curve (the price/output response curve) has a positive slope At low levels of aggregate output, the curve is fairly flat. As the economy approaches capacity, the curve becomes nearly vertical. At capacity (FE), the curve is vertical.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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Aggregate Supply in the Short Run

Macroeconomists focus on whether or not the economy as a whole is operating at full capacity.fokus : perekonomian beroperasi pada
FE

Even if firms are not holding excess labor and capital, the economy may be operating below its capacity if there is cyclical
unemploymentmeskipun perusahaan tidak kelebihan labor dan kapital perekonomian beroperasi di bawah FE bila terjadi pengangguran siklus
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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Output Levels and Price Responses

An increase in aggregate demand when the economy is operating at low levels of output is likely to result in an increase in output with little or no increase in the overall price level..pada Y yang redah, AD Y (Yo ke Y1) dan P sedikit (Po ke P1)

As the economy approaches maximum capacity, firms respond to further increases in demand only by raising prices.perekonomian mendekati FE : perusahaan merespon kenaikan AD dg menaikkan P (Y2 ke Y3 : P2 ke P3)
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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The Response of Input Prices to Changes in the Overall Price Level

There must be a lag between changes in input prices and changes in output prices, otherwise the aggregate supply (price/output response) curve would be verticalterdapat lag antara perubahan P input dan PY (P output) AS (kurva respon P/Y) menjadi vertikal

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

yst

The Response of Input Prices to Changes in the Overall Price Level

Wage rates may increase at exactly the same rate as the overall price level if the price-level increase is fully anticipated. Most input prices, however, tend to lag increases in output prices.upah mungkin
naik dengan tingkat yang sama dengan kenaikan P apabila kenaikan P ini diantisipasi. Sebagian besar P input cenderung terjadi lag dalam kenaikan P

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

yst

Shifts of the Short-Run Aggregate Supply Curve

A leftward shift of the AS curve could be caused by cost shocks (cost ). A decrease in costs, economic growth, or public policy, can cause a rightward shift of the AS curve.

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

yst

Shifts of the Short-Run Aggregate Supply Curve

Factors That Shift the Aggregate Supply Curve Shifts to the Right
Increases in Aggregate Supply Lower costs lower input prices lower wage rates Economic growth more capital more labor technological change Public policy supply-side policies tax cuts deregulation Good weather

Shifts to the Left

Decreases in Aggregate Supply Higher costs higher input prices higher wage rates Stagnation Capital deterioration

Public policy waste and inefficiency over-regulation

Bad weather, natural disasters, destruction from wars

Principles of Economics, 6/e Karl Case, Ray Fair

2002 Prentice Hall Business Publishing

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The Equilibrium Price Level

The equilibrium price level is the point at which the aggregate demand and aggregate supply curves intersect.
P0 and Y0 correspond to equilibrium in the goods market and the money market and a set of price/output decisions on the part of all the firms in the economy.
yst

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

The Long-Run Aggregate Supply Curve

Costs lag behind price-level changes in the short run, resulting in an upward-sloping AS curve, but ultimately move with the overall price level.

If costs and the price level move in tandem in the long run, the AS curve is vertical.

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

yst

The Long-Run Aggregate Supply Curve

Y0 represents the level of output that can be sustained in the long run without inflation. It is also called potential output.
Output can be pushed above potential GDP by higher aggregate demand. The aggregate price level also rises..

Y ( Y1>Yo) dg menaikkan AD (ADo ke AD1) P (Po ke P1)

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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The Long-Run Aggregate Supply Curve

When output is pushed above potential, there is upward pressure on costs. Rising costs push the short-run AS curve to the leftY > YFE (Y1>Yo Cost AS (Ke atas) If costs ultimately increase by the same percentage as the price level, the quantity supplied will end up back at Y0.bila % kenaikan Cost = % kenaikan P Y akan kembali ke YFE (Y1 ke Yo)
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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AD, AS, and Monetary and Fiscal Policy

AD can shift to the right for a number of reasons, including an increase in the money supply, a tax cut, or an increase in government spending.AD karena M , T , G

Expansionary policy works well when the economy is on the flat portion of the AS curve, causing little change in P relative to the output increasefiskal ekspansif (G, T) akan optimal (Y banyak) bila AS landai P sedikit (Po ke P1) Y banyak (Yo ke Y1)
Karl Case, Ray Fair

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

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AD, AS, and Monetary and Fiscal Policy

On the steep portion of the AS curve, expansionary policy does not work well. The multiplier is close to zero.pada AS yang curam : kebijakan ekspansif tidak bekerja dg baik
When the economy is operating near full capacity, an increase in AD will result in an increase in the price level with little increase in outputperekonomian mendekati FE : AD P banyak, Y sedikit
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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Long-Run Aggregate Supply and Policy Effects

If the AS curve is vertical in the long run, neither monetary policy nor fiscal policy has any effect on aggregate output.. pada AS vertikal (jangka panjang) : fiskal dan moneter tidak berdampak pada AD In the long run, the multiplier effect of a change in government spending or taxes on aggregate output is zero..dalam jangka panjang : efek multiplier G atau T Y tetap dan P

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

yst

Causes of Inflation
Inflation is an increase in the overall price levelkenaikan harga semua barang Sustained inflation occurs when the overall price level continues to rise over some fairly long period of timeharga semua barang meningkat terus dalam jangka panjang Sustained inflation is essentially a monetary phenomenon. For the price level to continue to rise period after period, it must be accommodated by an expanded money supply.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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Causes of Inflation
Demand-pull inflation is inflation initiated by an increase in aggregate demand. Cost-push, or supplyside, inflation is inflation caused by an increase in costs.

2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

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Cost-Push, or Supply-Side Inflation

Cost-push inflation is one possible cause of stagflationa situation in which output is falling at the same time that prices are risingY , P
Cost shocks are bad news for policy makers. The only way to counter the output loss is by having the price level increase even more than it would without the policy action.
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2002 Prentice Hall Business Publishing

Principles of Economics, 6/e

Karl Case, Ray Fair

Expectations and Inflation

If every firm expects every other firm to raise prices by 10%, every firm will raise prices by about 10%. This is how expectations can get built into the system.
In terms of the AD/AS diagram, an increase in inflationary expectations shifts the AS curve to the left..e AS kekiri/kebawah
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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Money and Inflation

Hyperinflation is a period of very rapid increases in the price level.
An increase in G with the money supply constant shifts the AD curve from AD0 to AD1. This leads to an increase in the interest rate and crowding out of planned investment G M tetap AD (kekanan) karena crowdingout : r I
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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Money and Inflation

Hyperinflation is a period of very rapid increases in the price level.
If the Fed tries to prevent crowding out by keeping the interest rate unchanged, it will increase the money supply and the AD curve will shift farther and farther to the right. The result is a sustained inflation, perhaps hyperinflation.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

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