Key concepts Macroeconomic theory consists of aggregate demand and aggregate supply. Their interaction has a decisive influence on the volume and dynamics of national production, employment, price dynamics and the implementation of other macroeconomic goals
Aggregate demand is the needs of households, firms and the state for consumer and investment goods and services, presented on the market in monetary form. Let's imagine it on a commodity market chart.
Rice. 1.
P - price level of goods,
Q is the real volume of GNP.
The inverse relationship argument relates to:
- 1. interest rate effect;
- 2. wealth effect;
- 3. the effect of import purchases.
- (1): increase in prices - increase in demand for money - increase in interest rates for loans in the money market:
households reduce purchases of consumer goods in order to pay less for loans;
firms reduce purchases of investment goods, since for many of them the profit in this case will not exceed payments to banks for borrowed funds;
the state is reducing purchases of consumer goods (grain from farmers under state orders) and investment goods (equipment for public sector enterprises).
The overall result is a fall in aggregate demand, and therefore in GNP.
- (2): rising prices - the population feels poorer (stocks, bonds and other assets depreciate relatively in value) and reduces its current demand. And, conversely, in conditions of deflation, the population begins to feel richer and spend their current income more freely.
- (3): an increase in prices for domestic goods - a fall in demand for them, as incentives to purchase imported goods from those countries where prices grow more slowly or remain unchanged increase (Snickers instead of Alenok, Ford instead of Zhiguli ). And, conversely, the reduction in price of Japanese video equipment means an increase in demand for it in Japan while refusing to purchase similar Korean products.
So, the most important factor influencing aggregate demand is the price level, and the relationship between them, called the law of demand, is inverse. However, there are, in addition, non-price determinants of aggregate demand Zubko N.M. Economic theory textbook. - Mn.: STC API, 2015. P. 56..
Non-price factors do not influence the very shape of the aggregate demand curve, but under their influence the AD curve can shift to the right and left.
To consider the direction of influence of non-price determinants of aggregate demand, let us recall the structure of GNP using the expenditure flow method:
GNP = C + I + G + TB (1)
The dynamics of each component of aggregate demand (gross expenditure) is affected by a very specific combination of factors.
1. Changes in consumer demand (C) may be due to:
Changes in consumer welfare, that is, the real value of their stocks, bonds, real estate, foreign currency, durable goods, jewelry. If the dollar exchange rate against the ruble rises, then households that own them do not think about the future in their purchases, and the AD curve shifts to the right. If housing prices grow at an accelerated pace, then there will be a similar shift for those who own housing and spare no money on its arrangement. If the shares owned by households depreciate, then their desire to save more to restore their weakened wealth is realized, and the AD curve shifts to the left.
Consumer expectations (inflationary, deflationary, deficit, etc.). If consumers expect their incomes to rise faster than prices in the future, then other equal conditions their current income is boldly allocated to current consumption, and the AD curve shifts to the right. Conversely, the expectation of impending impoverishment pushes up saving activity, and the AD curve shifts to the left.
Consumer debt: An increase in debt causes households to save more, which corresponds to a leftward shift in the AD curve. And, conversely, having paid off the debt consumer credit(for previously purchased computers, furniture, etc.), households may temporarily refrain from saving, and aggregate demand increases.
Size of straight and indirect taxes paid by households: its increase means a fall in consumer spending and vice versa.
2. Of all the components of total spending, investment demand is the most variable: during economic downturn Usually there is a rapid decline, which can be significantly greater than the magnitude of this decline. Thus, in the United States, in the crisis year of 1982, real GNP decreased by $105 billion. Investment, as its component, decreased by $152 billion. Similarly, if during the period 1990-1999. GDP in Russia decreased by 40%, then gross investment in 1999 amounted to only 22.8% of the 1990 level.
Factors of extreme instability of investments:
long service life of fixed capital: entrepreneurs lack the necessary funds during a crisis, and the replacement of worn-out equipment is postponed until better times;
initiating investment activity scientific and technological progress develops impulsively, innovations are irregular;
The level of investment demand is influenced by a huge number of non-price factors that make up the content of the concept of “investment climate”. This:
Expected rate net profit, which entrepreneurs expect to receive from their investment expenses (revenue minus costs minus taxes). A decrease in profitability entails a drop in investment activity. Thus, in Sweden, the accumulation rate (the ratio of the accumulation fund to national income) was 25% in 1965, 22% in 1975, and 19% in 1978. Investment recession factor: high level of costs in Swedish industry compared to its main competitors. Thus, the explosion of labor costs in 1975-76. combined with unfavorable trends in labor productivity, gave rise to a reduction in production profitability and pessimism in corresponding expectations. The rise in oil prices, which entailed an increase in the costs of energy-intensive industries, led to similar consequences. Kamaev V.D. Economic theory: textbook. - M.: VLADOS, 2014. P.110..
Real interest rate. Interest has to be paid to the owner of the capital from whom the company borrows money to invest in production. Thus, interest is included in the investment costs. This is also true if investments are made from the firm's own profits: by directing it to expand capital, the firm actually refuses the income associated with lending capital to another entrepreneur.
The dependence of investment demand on the interest rate I = f (r) is inverse. At the same time, the interest rate has a threefold impact on the level of investment activity:
an increase in the interest rate above the expected rate of return generates a massive refusal of investment, placing money in the bank;
increasing the interest rate for using a loan - bank loans are taken only by those who expect to receive a very high rate of return;
a potential investor may try to obtain capital by contacting stock exchange, but this requires a high rate of shares issued by it. And this rate is inversely related to the interest rate. True, in the future, if the company proves its competitiveness and the stock price remains low enough, then there will be a massive purchase of them and a transfer of capital from banking sector to the stock market, which will generate a decrease in interest rates and an increase in stock prices. But this will happen only in the long term; in the short term, an increase in interest rates inevitably means a decline in the investment sphere.
When making investment decisions, entrepreneurs compare with their rate of return precisely the real interest rate r, which is equal to the nominal (announced) interest rate (i) minus the inflation rate p:
If, for example, the rate of return is 20% and the real interest rate is 10%, then real investment quite appropriate. But if the real interest rate is excessively high (say, due to a deficit state budget and the government’s urgent need to attract private sector savings to cover it), then productive investments become less profitable compared to financial ones and are inevitably reduced.
It should be taken into account that in the course of regulating real interest rates that directly determine the investment process, the state must equally avoid setting their values too high and too low. In the latter case, the loan fee will be just as economically unjustified, since it will keep ineffective, unprofitable enterprises afloat, “grinding” limited investment resources and thereby slowing down the country’s economic growth.
The expected profit itself depends on many factors, in particular on tax policy. High taxes do not stimulate investment. According to an econometric study conducted by specialists from the Council of Economic Advisers under the US President, a decrease in taxes on labor income (from 41.6% to 38.0%) and an increase in taxes on capital income (from 34.5% to 38.4% ) in the United States increased investment in fixed assets (not counting investments in the housing sector) by $28 billion. during 1982-83 Tax reforms of the 80s. led to an increase in gross investment in the country by $90 billion. for 1985-91 Therefore, in many countries in recent decades, reduced (down to zero) tax rates on the profits of firms used for investment.
The real interest rate, in turn, is affected by the money supply in circulation, the rate of inflation, and government policy money-credit policy. Thus, high inflation (over 25-40% per year) reduces investment activity in the real sector of the economy, especially in capital-intensive industries with a low rate of capital turnover (it is simply impossible to keep up with such inflation). Even a relatively low average monthly increase in the general price level of 4-5%, combined with a positive real interest rate, paralyzes medium-term industrial investments, allowing for capital investments with a payback period of at best six months. And only as inflationary processes slow down (primarily by limiting the money supply), the costs of uncertainty are reduced, which increases the attractiveness of investment for enterprises in the real sector of the economy. However, excessive contraction of the money supply, aimed at eradicating inflation, in turn, can also cause an investment recession in the economy - due to a sharp rise in the cost of credit. Therefore, a state interested in an investment boom should strive not for the minimum, but for the optimal inflation level for it in each given period, at which investment activity in the country is the highest.
Forecast of investment prospects (including changes in the scientific and technical sphere, political life of the country, legislation). For example, investors' expectation of the country returning to a totalitarian regime will lead them to understand that investments will most likely not pay off, since a closed economy with its limited export opportunities and narrow product sales will return again. The instability of legislation (tax, customs, etc.) is especially reflected in the level of foreign investment.
3. Changes in government demand (G) are due to:
the size of the revenue side of the state budget, the increase of which expands the government’s ability to purchase the goods and services it needs;
public debt accumulated in the previous period, the servicing of which does not allow increasing, for example, public investment in the national economy;
phase economic cycle, through which the country passes. Thus, in conditions of economic growth, the size of government purchases can be reduced in order to avoid the transition of aggregate demand to the classic segment of the AS curve. And, conversely, in a crisis situation, the government (especially using the recommendations of the Keynesian school) may try to compensate for the reduction in consumer and investment demand by adequately increasing government demand. This is precisely the goal pursued, for example, American President Roosevelt, deploying in the crisis of the 30s. global and very expensive investment projects type of highway construction. In many ways, modern ambitious space projects implement a similar function. Along with the government’s concerns about the future of the national economy, it, by expanding the range of government demand, seeks to compensate for the country’s deficit in private demand;
political party in power. If left-wing parties tend to increase government purchases and thereby expand the public sector of the economy, then right-wing parties, on the contrary, strive to minimize the government’s ability to spend significant amounts of money. budget resources and thereby take away from taxpayers (the private sector) a significant part of their income.
4. Changes in the amount of external (foreign) demand for the products of a given country (TV) depend on the capacity of the sales markets for its products, on the degree of development of the country’s integration ties, on the ratio of prices for products exported and imported by it, etc. Economics course: textbook / Ed. B.N. Reisberg. - M.: INFRA-M, 2013. P.87.
So, aggregate demand is the total amount of goods and services that households, firms, the state, and abroad are willing to purchase at different price levels in the country. The relevance of studying aggregate demand is determined by the ability to use the acquired knowledge to form an adequate model of the economy in the Russian Federation.
When analyzing a separate product market, we distinguished between individual and market demand. When analyzing effective demand at the level of the entire national economy from all its subjects (i.e. sectors, including abroad), we are already using a new category -"aggregate demand". The diverse needs of subjects of the national economy, presented in monetary form, act as aggregate demand.
Aggregate demand (AD - aggregate demand) is always limited by those monetary incomes that consumers intend to use to satisfy their needs. Aggregate demand is the sum cash expenses for final goods of all economic entities produced in national economy.
All aggregates take part in the formation of aggregate demand.subjectsnational economy:a) household sector; b) business sector; c) state; d) sector “abroad”, or the outside world.
Thus, aggregate demand expresses the volume of GDP that consumers are willing to buy at the current level of prices and money income.
Aggregate demand consists of four elements:
1) consumer demand households for goods and services;
2) investment demand ;
3) public procurement goods and services;
4) foreign demand for domestic goods.
The main factor influencing aggregate demand is price . But a distinctive feature of aggregate demand is that what has to be purchased here is nothing more than GDP. This means that when forming aggregate demand, the price parameter cannot be expressed in the form of a price for a specific product. Therefore, when analyzing aggregate demand, we will have to use such a concept as "aggregate price level", or price index, expressing the dynamics of the entire set of prices for final products.
Among non-price factors aggregate demand are distinguished: a) nominal cash income, used to purchase the final product; b) the mass of real wealth; c) the degree of openness of the national economy in relation to the outside world (the influence of exports and imports); d) speed scientific and technological progress; e) improvement of technology and organization of production, changes in labor productivity in the national economy; f) tax and investment regime in the country; g) inflationary, political and other expectations, which is reflected, among other things, through the speed of money movement.
For graphic reflection the degree of dependence of the magnitude of aggregate demand on the price factor, a two-sector model “price - volume of demand” is used. The price level (P) is plotted vertically, and the volume of aggregate demand, or the volume of purchased GDP (Y), is plotted horizontally. The aggregate demand curve illustrates the change in the amount of spending by the household, business, government, and foreign sectors at each possible price level. The AD curve acts as a locus of points, each of which corresponds to a certain combination of output volume and the general price level in the national economy.
The aggregate demand curve has a pronounced negative slope. It turns out that the lower the price level in the country, the greater the volume of GDP (Y) will be purchased with the same mass Money in circulation.
The reason for the negative slope of the AD curve is explained by the monetary equation (M x V = P x Y). If the speed of money movement is taken as a constant value, then it turns out that the higher the price level, the less real monetary wealth, or purchasing power, consumers have.
In a more detailed analysis, the negative slope of the aggregate demand curve is explained by: a) interest rate effect; b) real wealth effect; V) the effect of import purchases.
Improving economic and other conditions for the manifestation of aggregate demand shifts the AD curve to the right (i.e., a precondition is created for an increase in GDP); deterioration - to the left (which means creating the preconditions for a reduction in GDP).
TO AD curve shift factors It is necessary to include all the most important circumstances that have a direct impact on the components of aggregate demand, primarily on the volume of consumption in the household sector and investment expenditures.
Aggregate demand is directly influenced by changes that take place in economic policy states. These traditionally include public procurement and taxation. Thus, government purchases stimulate aggregate demand and cause a shift of the AD curve to the right.
The aggregate demand curve AD responds to changes exogenous (external) factors(for example, on the state of production in partner countries), as well as internal investment climate . The above monetary equation identifies the volume of money supply (M) and the speed of money movement (V) as non-price factors for shifting the AD curve. The converted money supply (M x V) determines the horizontal position of the aggregate demand curve, i.e., the degree of its shift.
It should be noted that non-price factors have an impact on aggregate demand not in isolation, but complex impact. Moreover, very often each factor can differently influence the formation of aggregate demand.
Aggregate Demand (AD) (aggregate demand)- this is the real volume of national production (GNP) that domestic and external consumers, firms and the state are ready to purchase at any possible price level in the country. Aggregate demand can be graphically depicted as a curve (Fig. 3.1).
Aggregate demand is the total expenditures of macroeconomic entities on final goods and services produced in the economy during a certain period of time. Other things being equal, the higher the price level in a country, the lower the real volume of GNP that will be purchased by buyers.
Aggregate demand curve (AD) shows the number of goods and services that will be purchased at each this level prices The inverse relationship between the price level and the volume of aggregate demand or negative slope of the curve AD is explained by three effects (price factors): the effect Keynes(interest rate effect); effect Pigou(the effect of real cash balances, or the wealth effect); effect import purchases.
Interest rate effect(Keynes effect) is expressed in the fact that as prices rise, the demand for money increases; With a constant money supply, the interest rate rises. Thus, the volume of investment in the economy is reduced, which means that the volume of aggregate demand is also reduced. Thus, when the price level in the country increases commercial banks raise interest rates to justify their loans. High interest rates reduce the interest of potential borrowers. Entrepreneurs refusing loans reduce the demand for investment goods. Households are refusing some of their large purchases in this moment not wanting to pay high percent for loans. Both reduce the quantity of aggregate demand.
Effect of real cash balances, or wealth(Pigou effect) refers to the decrease in wealth caused by an increase in the price level, which leads to a decrease in consumption and therefore aggregate demand. That is, if the price level rises in the country, i.e. There is inflation, then the financial savings of society with a fixed monetary value depreciate. Society becomes relatively poorer and reduces the volume of its purchases. And vice versa, if the price level in a country decreases, then society becomes richer and the volume of GNP purchased by buyers increases.
Pigou Arthur Cecil (1877 - 1959) - English economist, neoclassicist of the Cambridge school of political economy, student and follower of A. Marshall. Main works: “The Economic Theory of Welfare” (1920); “Employment and balance”, “Underemployment”; "Fluctuations in Industrial Activity." Pigou, a supporter of free competition, opposed government intervention in the problems of pricing and redistribution of resources. The formulation of the Rigoux effect is that the economy is self-regulating.
Effect of import purchases is that rising prices within the country with stable import prices leads to a reduction in exports. Consequently, aggregate demand in the national economy is reduced. Moreover, if the price level for domestic goods increases, buyers will try to replace the more expensive domestic goods with cheaper imported ones.
Price factors explain downward the trajectory of the aggregate demand curve and, under their influence, the amount of aggregate demand can increase or decrease depending on the price level. Graphically, this is expressed by the displacement of a point along the curve (Fig. 3.2).
Non-price factors aggregate demand are the determinants that cause changes in the nature of aggregate demand. Under their influence, aggregate demand will change at all possible price levels. TO non-price factors AD refers to everything that affects change : consumption; investments; government spending; net exports. On the graph, these changes will be graphically illustrated by the shift of the entire curve AD either to the right or to the left (Fig. 3.3).
Aggregate demand reflects the relationship between the amount of aggregate output demanded and the general price level in the economy. The value of aggregate demand represents the total volume of final goods and services produced in the economy, for which demand is provided by economic agents.
In the structure of aggregate demand, demand can be distinguished:
On consumer goods and services.
For investment goods.
For goods and services from the state.
On our exports from foreigners (or on net exports, if demand for imports is included in the first three components of aggregate demand).
Some components of aggregate demand are relatively stable and change slowly, for example, consumer spending. Others are more dynamic, such as investment spending.
The aggregate demand curve AD shows the quantity of goods and services that consumers are willing to purchase at each possible price level. It gives such combinations of output and the general price level in the economy at which the commodity and money markets are in equilibrium.
Movement along the AD curve reflects changes in the quantity of aggregate demand depending on the dynamics of the general price level. The simplest expression of this relationship can be obtained from the equation of the quantity theory of money:
where M is the amount of money in the economy; V – velocity of money circulation; P – price level in the economy, in in this case– price index; Y is the real volume of output for which there is demand.
The negative slope of the AD curve is explained as follows: the higher the price level P, the lower the real reserves of funds M/P (the AD curve is constructed under the condition of a fixed supply of money M and a constant velocity of circulation V), and therefore, the lower the quantity of goods and services , for which Y is in demand.
The explanation for the inverse relationship between the volume of aggregate demand and the price level is associated with two effects - the wealth effect and the substitution effect.
The wealth effect is as follows: a rise in prices, all other things being equal, leads to a decrease in the real wealth of households - the real purchasing power of accumulated savings decreases. financial assets (valuable papers, bank deposits, cash), which makes their owners poorer and encourages spending cuts (people try to make up for reduced savings by reducing consumption).
The substitution effect manifests itself in two ways. First, rising prices increase the demand for money. With a constant supply of money, an increase in demand for it increases the interest rate, which reduces the expenses of economic agents (both consumer and investment) due to obtaining a loan. People postpone purchasing goods on credit for the future because they cannot pay high interest rates: they increase savings today in order to consume more in the future (consumption today is replaced by consumption in the future).
Another manifestation of the substitution effect is sometimes called the import effect. Rising prices for domestic goods while stable prices for imported goods shift part of the demand from domestic output to imports and at the same time reduce exports (they become more expensive for foreigners), which also reduces aggregate demand in the economy.
Non-price factors include all factors of aggregate demand, except for the price level, which affect consumer spending and net exports. Among them are changes in the welfare of consumers and their expectations, taxes, interest rates, the situation on foreign markets, the provision (or vice versa, the elimination) of subsidies and preferential loans to investors, fluctuations exchange rates etc. The equation of the quantity theory of money, which is used to determine the AD curve, allows us to identify two more non-price factors of aggregate demand: the supply of money M and the velocity of its circulation V.
All of the listed non-price factors of aggregate demand can be combined into three groups: expectations of economic agents (about their future income, inflation, economic activity, etc.), influence outside world. The impact of shocks can be divided into a separate group, for example financial crises, stock market crashes that deprive economic agents of part of their financial assets and thus reduce their welfare and, accordingly, expenses.
The impact of non-price factors on aggregate demand is reflected in the graph by a shift in the AD curve. For example, an increase in the supply of money (or the velocity of its circulation) and a corresponding increase in effective demand in the economy will be reflected in the graph by a shift of the AD curve to the right to AD 1 (Fig. 1), and a decrease in demand for oil on the world market and a corresponding reduction in oil exports will be reflected graphically by a shift AD left to AD 1 (Figure 2).
Fig.1. Shift to the right of the AD curve Fig. 2. Shift to the left of the AD curve
due to an increase in the money supply due to a decrease in exports
Often the direct impact of any non-price factor on aggregate demand is not the only one, and additional analysis is required to assess the final effect. Thus, an increase in government spending directly leads to an increase in aggregate demand. However, if the government finances these expenditures by borrowing financial market, by selling bonds, it takes part of the resources from money market. Then, with a constant total supply of money in the economy and continued demand for it from the private sector, the interest rate increases. This, in turn, complicates the investment activities of the private sector, the purchase of expensive goods by consumers, etc., i.e. reduces other components of aggregate demand.
Aggregate offer: classical and Keynesian models.
Aggregate supply is the total quantity of final goods and services in an economy that firms are willing to produce and offer to the market at any given price level. The concept is often used synonymously with gross national (or domestic) product.
The value of aggregate supply depends on three main factors - the amount of labor L, capital K and the level of technology T. Their influence on the value of aggregate supply (GDP) is described by the production function Y=F (L, K, T). At any given moment in time, the amount of capital and the state of technology in the economy are fixed, determined by the previous development of the economy. But the amount of labor depends on the current situation on the market and is determined by the demand for labor on the part of firms and its supply on the part of workers. The state of the labor market can be characterized by full employment, exceed it, or be at a level below full employment.
The volume of GDP that can be produced with full use of resources (primarily work force), is usually called potential GDP (Y*). Potential output corresponds to full employment in the labor market, or the natural rate of unemployment. Therefore, potential output is sometimes called the natural level of output. Actual values GDP fluctuates around its potential level.
AD P AD 1
0 Y Y 1 Y 0 Y Y 1 Y
Fig.3. Growth of the total Fig.4. Aggregate demand growth
Demand with steep AS demand with flat AS
The aggregate supply curve AS characterizes the relationship between the volume of output and the price level in the economy and shows what volume of aggregate output can be offered to the market by producers at different values of the general price level in the economy. The degree of slope of the AS curve determines the result that can result, for example, from a change in aggregate demand in the economy under the influence of non-price factors, reflected by a shift in the AD curve (Fig. 3,4). An increase in aggregate demand with a steep AS (Fig. 3) leads to a significant increase in prices (from P to P 1) and a small increase in output (from Y to Y 1).
Conversely, flat AS makes it possible to significantly increase output with a small increase in prices.
The shape of the AS curve is interpreted differently depending on what time period is being analyzed. There are long-term and short-term AS curves. They are often called classical and Keynesian curves in accordance with the schools of economic thought within which they were considered.
The difference between short-term (usually up to two or three years) and long-term periods in macroeconomics is associated mainly with the behavior of prices and real variables. In the short term, prices (prices of goods and services, nominal wages, nominal interest rates) change slowly under the influence of market fluctuations, usually talking about their relative “rigidity”. Real values (output volume, employment level, real interest rate, real wages, etc.) are more flexible. In the long run, on the contrary, prices end up changing quite strongly, they are considered “flexible”, and real variables change extremely slowly, so for the convenience of analysis they are often considered constant (with the exception of the theory of economic growth itself) or supply shocks associated with changes in the volume of resources in the economy.
The classical model describes the behavior of the economy in the long term. Analysis of aggregate supply in classical theory is based on the following conditions:
The volume of output depends only on the number of factors of production (labor and capital) and technology and does not depend on the price level.
Changes in factors of production and technology occur slowly.
The economy operates under conditions of full employment of production factors (which corresponds to the natural rate of unemployment), therefore, output is equal to potential.
Prices, nominal wages, nominal interest rates, etc. are flexible, their changes maintain equilibrium in the relevant markets.
The long-run aggregate supply curve LRAS under these conditions is vertical at the level of output at full factor employment, i.e. at potential level Y*. The volume of production does not depend on the price level.
The explanation of the shape of the AS curve in the classical model is associated, first of all, with the analysis of the labor market. It is believed that it is always in equilibrium at full employment of the labor force (unemployment, if it exists, is voluntary). This means that output cannot be increased even with an increased price level - there is no additional labor for this. Deviations from equilibrium can only be temporary. Accordingly, output may deviate from potential only over short periods of time.
Fig.5. Long-term growth in aggregate demand
Let's assume that the economy is in equilibrium at point E at the potential level (Fig. 5). An increase in aggregate demand will lead to a shift of the AD curve to AD 1. At the same price level P, the demand for goods increases. Firms will want to hire more workers and expand supply, but the economy is at full employment and there is no available labor. Increased demand in the labor market will lead to an increase in nominal wages(in conditions of labor shortages, workers may demand, and firms will offer, competing with each other, higher wages). Rising wages will increase costs and, accordingly, prices for finished products. As a result, the price level in the economy rises, but output remains the same. A new equilibrium will be established at point E 1. Thus, over a long period, both in the labor market and in other markets, economic agents have the opportunity to adapt their behavior to emerging fluctuations in demand by adjusting prices (for example, revising the terms of contracts), which allows restoring equilibrium in markets. IN real economy Events constantly occur that lead to a deviation of actual GDP from potential, and the unemployment rate from natural. A long period in macroeconomics is often considered to be one during which the forces that return the economy to equilibrium have time to come into play: GDP to its potential, the unemployment rate to its natural value.
Shifts in LRAS are possible only when the treated factors of production or technology change, i.e. production capabilities of the economy. If there are no such changes, then the AS curve in the long run is fixed at the level of potential output, and any fluctuations in aggregate demand are reflected only in the price level.
The Keynesian model considers the functioning of the economy over relatively short periods of time. Aggregate supply analysis is based on the following premises:
The economy operates under conditions of underemployment of production factors.
Prices, nominal wages and other nominal values are relatively rigid and react slowly to market fluctuations.
Real values (output, employment, real wages, etc.) are more flexible.
The AS curve in the Keynesian model is horizontal (in the extreme case, with fixed nominal wages and relatively flexible prices).
The reasons for the relative rigidity of nominal values in the short term are the duration employment contracts, government regulation minimum wage, the stepwise nature of changes in prices and wages (when firms change prices and wages gradually, in “portions”, with an eye on competitors), the duration of contracts for the supply of raw materials and finished products, activities of trade unions, the “menu” effect, etc.
For example, if the costs of re-issuing catalogs with prices for manufactured products are quite large and the process of re-issuing itself requires a certain time (the “menu” effect), then with an increase in demand, firms will strive for some time to hire an additional number of workers, increase output and satisfy customer demand at the same price level. In this extreme case of absolutely rigid prices, the short-run AS curve will be horizontal (Fig. 6, where SRAS is the short-run aggregate supply curve).
This representation of the AS curve is convenient for analysis, but in practice the situation reflected by the horizontal AS is not often encountered.
AD SRAS'Fig.6. Horizontal
(SRAS) and oblique (SRAS’) short-run aggregate supply curves
If nominal wages are sufficiently rigid, change slowly, and prices remain relatively flexible, then their growth, especially unexpected ones, will lead to a fall in real wages, labor will become cheaper, which will contribute to an increase in demand for it from firms. Usage large quantity labor will lead to an increase in output. Thus, in a period when nominal wages do not change, a positive relationship appears between the price level and output. The AS curve under these conditions has a positive slope (see Fig. 6, SRAS’ curve).
This shape of the curve also has a microeconomic explanation. An unexpected increase in prices allows firms to increase average profit - the difference between the price of goods produced and average costs. The price rises, but the costs remain the same for some time, they reflect the terms of the contracts related to the amount of wages, interest on the loan, the price of raw materials and supplies, rent etc., the change of which takes time. Thus, firms have an incentive to expand output in the short run, which contributes to an increase in aggregate supply in the economy.
IN normal conditions Most firms have excess capacity (they can be 10-15%), stocks of finished products in warehouses, as well as the ability to use overtime or hire additional workers (especially in conditions of less than full employment). Therefore, in the short run, an increase in demand can always be met by some increase in sales without any significant change in prices.
It should be noted that in the Keynesian model the AS curve is limited on the right by the level of potential output, after which it takes the form of a vertical straight line, i.e. actually coincides with the long-term AS' curve.
Thus, the volume of aggregate supply in the short run depends mainly on the amount of aggregate demand. In conditions of underemployment of production factors and relative rigidity of prices, fluctuations in aggregate demand cause, first of all, changes in the volume of output (supply) and only subsequently can they be reflected in the price level. Empirical data confirms this position.
If the government wants to increase output in an economy that has not reached its potential output, then, according to the Keynesian approach, it must stimulate aggregate demand through fiscal or monetary policy, for example, increase government spending, reduce taxes, expand the money supply, etc. (Fig. 7).
P E E 1 SRAS
0 Y Y 1 Y
Fig.7. Growth in aggregate demand in the short term
Non-price factors of aggregate supply are changes in factors of production, technology, resource prices, taxation of firms, etc., which is graphically reflected by a shift in the AS curve.
Shifts in the long-term AS curve are caused by changes in potential output. For example, its increase can occur for several reasons: the number of workers corresponding to full employment conditions will increase, the stock of capital in the economy will increase, and more advanced technologies will appear. It should be borne in mind that in this case there will be a shift to the right of both the long-term and short-term AS curves.
Non-price factors leading to a shift in the short-term AS curve are mainly associated with changes in costs. For example, this may be due to an increase in nominal wages associated with changes in inflation expectations or the situation in the labor market; expansion of government subsidies to enterprises, increases in taxes and prices for resources, etc.
For example, a sharp increase in the price of petroleum products leads to an increase in costs and a decrease in supply at each given price level in the economy, which is graphically interpreted by a shift of the short-term AS curve to the left. A high harvest caused by unexpectedly favorable weather conditions will increase the volume of aggregate supply and will be reflected in the graph by a shift of the AS curve to the right.
Aggregate demand and factors determining it
Aggregate demand is the sum of all expenditures on final goods and services produced in an economy.
It reflects the relationship between the volume of total output demanded by economic agents and the general price level in the economy.
In the structure of aggregate demand we can distinguish:
- demand for consumer goods and services;
- demand for investment goods;
- demand for goods and services from the state;
- net export demand is the difference between foreigners' demand for domestic goods and domestic demand for foreign goods.
The aggregate demand curve superficially resembles the demand curve in a separate market, but it is constructed in a different coordinate system (Fig. 12.1). The abscissa axis indicates the values of the real volume of national production, denoted by the letter Y. They do not appear on the y-axis absolute indicators prices (for example, in billion rubles), and the price level (R), or deflator.
Rice. 12.1. Aggregate demand curve.
Moving along a curve AD reflects changes in aggregate demand depending on the dynamics of the general price level.
The simplest expression of this relationship can be obtained from the equation of the quantity theory of money: 
from here or where M- the amount of money in the economy; V- speed of money circulation; R- price level in the economy; Y- the real volume of output for which there is demand.
Negative slope AD explained as follows: the higher the price level R, the lower the actual cash reserves M/P(curve HELL is built subject to a fixed supply of money M and the speed of their circulation V), and, consequently, the quantity of goods and services for which there is demand is smaller.
The downward trajectory (negative slope) of the aggregate demand curve is also determined by:
- interest rate effect;
- wealth effect, or cash balance effect;
- effect of import purchases.
Interest rate effect manifests itself through the impact of changing price levels on interest rates, and, consequently, on consumer spending and investment. If we count money supply constant, then an increase in the price level automatically increases the demand for money, which means it increases interest rate. In turn, the higher the interest rate, the more consumers begin to save money and make fewer purchases. As a result, private savings increase. The rise in credit costs forces entrepreneurs to reduce investments - industrial purchases. Thus, demand from both private consumers and entrepreneurs is reduced, which leads to a decrease in the aggregate demand for real national product. Curve AD acquires a descending character and approaches the abscissa axis.
Wealth effect or real cash balances, manifests itself in the negative impact of inflation on household incomes. People's wealth in the form of fixed incomes decreases in inverse proportion to inflation. These are urgent accounts, bonds, wages, rent, pensions, benefits. Residual purchasing power people, individuals and legal entities is called real cash balances. By cutting their consumer spending in this way, they directly influence aggregate demand downward.
Effect of import purchases means that when the price level in the country increases, foreign-produced goods and services become relatively cheaper (all other things being equal). The population will purchase fewer domestic goods and more imported ones. Foreigners will reduce their demand for goods and services of a given country due to their rise in price. Consequently, there will be a decrease in exports and an increase in imports and overall net exports will decrease, reducing total aggregate demand.
These effects influence aggregate demand through prices, so the point moves along the aggregate demand curve. Under the influence of all non-price factors, the curve AD shifts left and right depending on the direction of action of the factor (Fig. 12.2). On the graph, an increase in aggregate demand is represented by a deviation of the curve to the right - from AD1 To AD2. This shift indicates that at different price levels the desired quantity of goods and services will increase. A decrease in aggregate demand is represented by a deviation of the curve to the left - from ADX To ADy This shift suggests that people will buy less of a product than before at different price levels. 
Rice. 12.2. Changes in aggregate demand.
Non-price factors influencing aggregate demand:
- changes in consumer spending:
- consumer welfare;
- consumer expectations;
- consumer debt;
- changes in investment costs:
- interest rates;
- expected returns on investment;
- corporate taxes;
- technology;
- excess capacity;
- changes in government spending;
- changes in net export expenditures:
- national income in foreign countries;
- exchange rates.
Aggregate supply and factors determining it
Aggregate supply is the total quantity of final goods and services produced in an economy (in in value terms). The concept is often used synonymously with gross national (or domestic) product.
AS(from English aggregate supply) shows what volume of total output can be offered to the market by producers at different values of the general price level in the economy. Curve Shape AS interpreted differently in the classical and Keynesian schools. The classical school believes that the aggregate supply curve AS vertical, Keynesian school - either horizontal or having a positive slope.Modern economics believes that at different stages of the reproduction process there can be three forms of the aggregate supply curve, which can be combined into one curve. This is shown graphically in Fig. 12.3. 
Rice. 12.3. Aggregate supply curve.
- horizontal, or Keynesian;
- ascending or intermediate;
- vertical, or classic.
The first section of the curve indicates that the economy is in a state of recession, crisis: there is underutilization of production capacity, a fixed level of prices and wages, a significant level of unemployment, i.e. the economy is characterized by the presence of excess resources that are not used. In this situation, growth in output can be achieved by bringing into play unused resources and without putting any pressure on the price level. Thus, producers can purchase labor and other resources at fixed prices, costs per unit of production will not increase when expanding production, and, therefore, there will be no reason to increase prices for goods.
The second section is characterized by the fact that a change in real production volume correspondingly causes a change in prices. In this area of production, additional resources are involved, and less efficient ones, since the expansion of production implies that some firms will have to use old and less efficient equipment, hire less qualified workers, etc. Therefore, unit costs increase and manufacturers must charge higher prices of goods so that production is profitable.
The third section of the curve reflects the state of the economy in which its production capabilities are almost completely used. This is expressed in full employment, maximum utilization of production capacity and, consequently, in the impossibility of further growth of production. Since the economy is running at full capacity, any increase in prices will not lead to an increase in real output.
The aggregate supply curve establishes the relationship between the price level and the real volume of national output, other things being equal. But when these conditions (they are called non-price factors of aggregate supply) change, the aggregate supply curve shifts. Non-price factors of aggregate supply include:
- change in resource prices:
- internal resources (labor, land, capital, entrepreneurial abilities);
- external (imported) resources;
- market dominance;
- changes in labor productivity;
- legal changes:
- business taxes and subsidies;
- government regulation.
When one or more factors change, the cost per unit of output at a given price level also changes. A decrease in unit costs shifts the aggregate supply curve to the right. Conversely, an increase in unit costs shifts the aggregate supply curve to the left.
Curve offset from AS1 To AS2 in Fig. 12.4 indicates an increase in aggregate supply. In the intermediate and classic segments of the aggregate supply curve, it shifts to the right, indicating that more real national output will be produced than before at a given price level. 
Rice. 12.4. Changes in aggregate supply.
On the Keynesian portion of the curve, an increase in aggregate supply means a decrease in the price level at different levels of national output. Curve offset from AS1 To AS3 to the left indicates a decrease in aggregate supply. At the intermediate and classic segments of the aggregate supply curve, less real national output will be produced than before at a given price level. On the Keynesian portion of the curve, a decrease in aggregate supply means an increase in the price level at different levels of national output.
It is the total quantity of goods and services that can be offered by entrepreneurial and public sectors at a certain price level. Aggregate supply can be equated to the value of the gross national product or to the value of national income:
The amount of aggregate supply is also influenced by various factors. Changes in resource prices. Their increase leads to an increase in production costs and, as a result, to a decrease in aggregate supply. Labor productivity growth leads to an increase in production volume and, accordingly, to an expansion of aggregate supply. Changing business conditions(taxes, subsidies). When taxes increase, costs increase and aggregate supply decreases.
A prerequisite for macroeconomic analysis is the aggregation of indicators. The aggregate supply of goods at equilibrium is balanced by aggregate demand and represents the gross national product of society.
The equilibrium national product is ensured by establishing the equilibrium aggregate price for the produced product, which is carried out at the intersection point of the aggregate demand and aggregate supply curves. Achieving an equilibrium production volume under conditions of always existing limited resources is the goal of national economic policy.
All the main problems of society are in one way or another connected with the discrepancy between aggregate demand and aggregate supply.
According to the classical model, which describes the functioning of the economy in the long run, the quantity of products produced depends only on the costs of labor, capital and available technology, but does not depend on the price level.
In the short run, prices for many goods are inflexible. They “freeze” at a certain level or change little. Firms do not immediately lower the wages they pay, and stores do not immediately revise the prices of the goods they sell. Therefore, the aggregate supply curve is a horizontal line.
Let us consider the change in the equilibrium state of the economy separately under the influence of aggregate demand and aggregate supply. With constant aggregate supply, a shift of the aggregate demand curve to the right leads to different consequences depending on where in the aggregate supply curve it occurs (Fig. 12.7). 
Rice. 12.7. Consequences of an increase in aggregate demand.
On the Keynesian segment (Fig. 12.7 a), different high level unemployment and a large amount of unused production capacity, expansion of aggregate demand (from AD1 before AD2) Y1 To Y2) and employment without increasing the price level ( P1). In the intermediate period (Fig. 12.7 b) the expansion of aggregate demand (from AD3 before AD4) will lead to an increase in real national production (from Y3 To Y4) and to an increase in the price level (from P3 before P4).
In the classic segment (Fig. 12.7 c), labor and capital are fully used, and the expansion of aggregate demand (from AD5 before AD6) will lead to an increase in the price level (from P5 before P6) and the real volume of production will remain unchanged, that is, it will not go beyond its level at full employment.
When the aggregate demand curve shifts backwards, the so-called ratchet effect(“a ratchet” is a mechanism that allows the wheel to be turned forward, but not backward). Its essence lies in the fact that prices rise easily, but do not tend to decline when aggregate demand decreases. This happens, firstly, due to the inelasticity of wages, which does not tend to decrease at least over a period of time, and secondly, many firms have sufficient monopoly power to resist lower prices during periods of reduced demand. We show the effect of this effect in Fig. 12.8, where for simplicity we omit the intermediate segment of the aggregate supply curve. 
Rice. 12.8. Ratchet effect.
With an increase in aggregate demand from AD1 before AD2 the equilibrium position will shift from E1 before E2, and real production volume will increase from Y1 To Y2, and the price level is from P1 before P2. If aggregate demand moves in the opposite direction and decreases from AD2 before AD1 the economy will not return to its original equilibrium position at the point E1 and a new equilibrium will arise (E3), at which the price level will remain P2. Output will fall below its original level to Y3. The ratchet effect causes the aggregate supply curve to shift from P1aAS before P2E2AS.
The shift in the aggregate supply curve also affects the equilibrium price level and real national output (Figure 12.9). 
Rice. 12.9. Consequences of changes in aggregate supply.
One or more non-price factors change, causing aggregate supply to increase and the curve to shift to the right, from AS1 before AS2. The graph shows that a shift in the curve will lead to an increase in real national output from Y1 To Y2 and a decrease in the price level from P1 before P2. A shift in the aggregate demand curve to the right indicates economic growth. The shift of the aggregate supply curve to the left of AS1 before AS3 will lead to a decrease in the real volume of national production from Y1 To Y3 and an increase in the price level from P1 before P3, i.e. to inflation.
It can be said that in the very general view economic equilibrium is the correspondence between the available limited resources (land, labor, capital, money), on the one hand, and the growing needs of society, on the other. The growth of social needs, as a rule, outpaces the increase economic resources. Therefore, equilibrium is usually achieved either by limiting needs (effective demand) or by expanding capacity and optimizing the use of resources.
There are partial and general equilibrium. Partial equilibrium is the quantitative correspondence of two interrelated macroeconomic parameters or individual aspects of the economy. This is, for example, the balance of production and consumption, budget income and expenditure, supply and demand, etc. In contrast to partial general economic balance means the correspondence and coordinated development of all spheres of the economic system. The most important prerequisites for OER are the following:
- correspondence between national goals and available economic opportunities;
- the use of all economic resources - labor, money, fixed assets, i.e. ensuring a normal level of unemployment and optimal reserves of capacity without allowing an abundance of idle capacity, mass unemployment, unsold goods, as well as excessive tension of resources;
- bringing the production structure in line with the consumption structure;
- correspondence of aggregate demand and aggregate supply in all four types of markets - goods, labor, capital and money.
It should also be noted that OER models will differ for closed and open economies, in the latter case taking into account factors external to a given national economy - exchange rate fluctuations, conditions foreign trade and so on.
Macroeconomic equilibrium cannot be considered as a static state; it is very dynamic and is unlikely to be achievable in principle, like any ideal state. Cyclical fluctuations are inherent in any economic system. But society is interested in ensuring that deviations from the ideal equilibrium (or balance) of economic interests are minimal, because too large fluctuations can lead to irreversible consequences - to the destruction of the system as such. Therefore, compliance with the conditions macroeconomic equilibrium is the basis for the socio-economic stability of a particular state.
1. Aggregate demand is the total volume of goods and services on a national scale that consumers, businesses and the government can purchase at the current price level.
2. Aggregate supply is the total quantity of goods and services that can be supplied by the business and government sectors at a certain price level.
3. Economic development is always associated with an imbalance, with a deviation from the average indicators of economic dynamics.
4. Economic equilibrium– this is the correspondence between the limited available resources (land, labor, capital, money), on the one hand, and the growing needs of society, on the other.