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AGGREGATE OUTPUT: The macroeconomy's total production of final goods and services. You might recognized it by it's official term gross domestic product. Another related term is aggregate supply. This is the total production in the economy that is purchased by the four basic economic sectors -- household, business, government, and foreign. See also aggregate market, aggregate demand, aggregate expenditures.

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AGGREGATE MARKET SHOCKS:

Disruptions of the equilibrium in the aggregate market (or AS-AD model) caused by shifts of the aggregate demand, short-run aggregate supply, or long-run aggregate supply curves. Shocks of the aggregate market are associated with, and thus used to analyze, assorted macroeconomic phenomena such as business cycles, unemployment, inflation, stabilization policies, and economic growth. The specific analysis of aggregate market shocks identifies changes in the price level (GDP price deflator) and real production (real GDP). Changes in the price level and real production have direct implications for the unemployment rate, the inflation rate, national income, and a host of other macroeconomic measures.
Aggregate market shocks are changes in aggregate market equilibrium caused by changes in the aggregate demand determinants and aggregate supply determinants. Because aggregate supply is represented by two curves, short-run and long-run, analysis of aggregate market shocks are frequently undertaken for the short-run aggregate market and the long-run aggregate market.

On the aggregate demand side, the curve-shifting determinants are the four aggregate expenditures--consumption expenditures, investment expenditures, government purchases, and net exports. On the aggregate supply side, the determinants are the quantity and quality of the resources (for both short-run and long-run) and resource price (for the short-run).

Eight Shocks

ShiftReal Production
Change
Price Level
Change
Long-Run Aggregate Market
Aggregate Demand
Increase
No ChangeIncrease
Aggregate Demand
Decrease
No ChangeDecrease
Aggregate Supply
Increase
IncreaseDecrease
Aggregate Supply
Decrease
DecreaseIncrease
Short-Run Aggregate Market
Aggregate Demand
Increase
IncreaseIncrease
Aggregate Demand
Decrease
DecreaseDecrease
Aggregate Supply
Increase
IncreaseDecrease
Aggregate Supply
Decrease
DecreaseIncrease
Given that each of the two aggregate market submodels (long run and short run) have two curves--aggregate demand and aggregate supply, each of which can increase or decrease--the analysis of aggregate market shocks comes in eight varieties. The table to the right summarizes the eight shocks and the resulting changes in real production and price level.

The first two entries in the table--changes in aggregate demand in the long-run aggregate market--are perhaps most notable. Because the long-run aggregate supply curve is stationary at the full employment level of output, changes in aggregate demand DO NOT change real production. This is a particularly important policy implication. In the long run, government policies designed to shift the aggregate demand curve (such as fiscal policy or monetary policy) do not change the level of real production from the full-employment level. At best, the only impact they have is on the price level. Any attempt to increase real production in the long run must come from other sources--such as supply-side, economic growth promoting changes in the quantity or quality of resources.

The rest of the entries in the table are consistent with what might be expected from standard market analysis. For both long run or short run, an increase in aggregate supply increases real production and decreases the price level, while a decrease in aggregate supply decreases real production and increases the price level. In the short-run aggregate market, an increase in aggregate demand increases real production and the price level, while a decrease in aggregate demand decreases real production and the price level.

Comparative Statics

Like other economic analyses employing the technique of comparative statics, the analysis of aggregate market shocks involves three key questions:
  • First, what causes a shock? The aggregate market can be shocked for a wide variety of reasons. While the shocks, in general, can be attributed to changes in the four expenditures (aggregate demand determinants) and resource quantity, quality, and resource price (aggregate supply determinants), a wide range of specific events operate on these determinants, including interest rates, government policies, inflationary expectations, labor force participation, and foreign economic activity.

  • Second, what are the consequences? The direct, observable consequences of aggregate market shocks are changes in the price level and real production, with short-run aggregate market consequences differing somewhat from long-run aggregate market consequences, especially for real production. However, other macroeconomic phenomena lurk behind the scenes of the aggregate market. Inflation is measured by changes in the price level. Resources are employed for, and national income is generated by, the real production. In addition, all sorts of activity in the aggregate financial and resource markets are intertwined with what transpires in the aggregate product market.

  • Third, are the consequences good or bad? Does the outcome of the shock generally benefit or harm society and the economy? Does the good outweigh the bad? Any good/bad evaluation is, of course, inherently the domain of normative economics. But analyses of aggregate market shocks includes who is helped or harmed and to what extent economic goals are attained.

Determinants

A quick overview of the assorted aggregate demand and aggregate supply determinants that shock the aggregate market are in order.
  • Aggregate Demand Determinants: The determinants that shift the aggregate demand curve are many and varied, including such things as interest rates, government polices, foreign exchange rates, consumer confidence, physical wealth, and the money supply. However, any and all of these determinants shift the aggregate demand curve through one of the four aggregate expenditures--consumption expenditures, investment expenditures, government purchases, and net exports. Any determinant that leads to an increase in an expenditure causes a rightward shift of the aggregate demand curve with a decrease causing a leftward shift of the curve.

  • Aggregate Supply Determinants: The determinants that shift the long-run and short-run aggregate supply curves are also many and varied. A short list includes technology, education, population growth, energy prices, and the stock of capital. However, any determinant that shifts one or both of the aggregate supply curves work through one of the three major categories--resource quantity, resource quality, and resource price. Any determinant that leads to an increase in a resource quantity or resource quality causes a rightward shift of both the long-run and short-run aggregate supply curves, with a decrease causing a leftward shift in both curves. Any determinant that leads to an increase in a resource price causes a leftward shift of the short-run aggregate supply curve (but not the long-run curve), with a decrease causing a rightward shift of the curve.

Long-Run Aggregate Market

Shocks
Long-Run Aggregate Market
Long-Run Aggregate Market


Consider how the long-run aggregate market is affected by an increase or decrease in either the aggregate demand curve or the long-run aggregate supply curve. The long-run aggregate market contained in the exhibit to the right should help. The two curves contained in this exhibit are the negatively-sloped aggregate demand curve (AD) and the vertical long-run aggregate supply curve (LRAS). At the initial equilibrium, the price level is 10 and real production is $100 billion, which happens to be the long-run full-employment level of real production.
  • Aggregate Demand Increase: An increase in aggregate demand can be caused by expansionary fiscal or monetary policy, a decrease in interest rates, a surge of optimistic consumer confidence, or a rise in the stock market that boosts financial wealth. An increase in aggregate demand is seen as a rightward shift of the aggregate demand curve. To illustrate this shift, click the [AD Increase] button. This shift generates a new long-run equilibrium at a higher price level (12), but the same quantity of real production ($100 billion). As expected, the price level increases, but real production remains at the full-employment level.

  • Aggregate Demand Increase: A decrease in aggregate demand can be caused by contractionary fiscal or monetary policy, an increase in interest rates, a mood of consumer pessimism, or a fall in the stock market that reduces financial wealth. Whatever the cause, a decrease in aggregate demand is seen as a leftward shift of the aggregate demand curve. To illustrate this shift, click the [AD Decrease] button. This shift generates a new long-run equilibrium at a lower price level (8), but the same quantity of real production ($100 billion). As expected, the price level decreases, but real production remains at the full-employment level.

  • Aggregate Supply Increase: An increase in long-run aggregate supply can be caused by an advance in technology, a surge in the size of the population, a boost in the capital stock, or an increase the quality of education. An increase in long-run aggregate supply is seen as a rightward shift of the long-run aggregate supply curve. To illustrate this shift, click the [LRAS Increase] button. This shift generates a new long-run equilibrium at a lower price level (8), and an increase in the quantity of real production ($120 billion). As expected, the price level decreases and real production increases.

  • Aggregate Supply Decrease: A decrease in long-run aggregate supply can be caused by a fall off in technology, a drop in the size of the population, a fall in the capital stock, or a decrease in the quality of education. Whatever the cause, a decrease in long-run aggregate supply is seen as a leftward shift of the long-run aggregate supply curve. To illustrate this shift, click the [LRAS Decrease] button. This shift generates a new long-run equilibrium at a higher price level (12), and a decrease in the quantity of real production ($80 billion). As expected, the price level increases and real production decreases.

Short-Run Aggregate Market

Shocks
Short-Run Aggregate Market
Short-Run Aggregate Market


Shocks to the short-run aggregate market are similar to that for the long-run market, with one important exception--changes in aggregate demand trigger corresponding changes in real production. Now consider how the short-run aggregate market is affected by an increase or decrease in either the aggregate demand curve or the short-run aggregate supply curve. The short-run aggregate market contained in the exhibit provides the needed framework. The two curves contained in this exhibit are the negatively-sloped aggregate demand curve (AD) and the positively-sloped short-run aggregate supply curve (SRAS). At the initial equilibrium, the price level is 10 and real production is $100 billion. This level of real production may or may not be the full-employment level of real production.
  • Aggregate Demand Increase: An increase in aggregate demand once again can be caused by expansionary fiscal or monetary policy, a decrease in interest rates, a surge of optimistic consumer confidence, or a rise in the stock market that boosts financial wealth. Whatever the cause, an increase in aggregate demand is seen as a rightward shift of the aggregate demand curve. To illustrate this shift, click the [AD Increase] button. This shift generates a new short-run equilibrium at a higher price level (11) and an increase in the quantity of real production ($110 billion). As expected, the price level and real production both increase.

  • Aggregate Demand Increase: A decrease in aggregate demand can be caused by contractionary fiscal or monetary policy, an increase in interest rates, a mood of consumer pessimism, or a fall in the stock market that reduces financial wealth. A decrease in aggregate demand is seen as a leftward shift of the aggregate demand curve. To illustrate this shift, click the [AD Decrease] button. This shift generates a new short-run equilibrium at a lower price level (9) and a decrease in the quantity of real production ($90 billion). As expected, the price level and real production both decrease.

  • Aggregate Supply Increase: An increase in short-run aggregate supply can be caused by an increase in any resource quantity or quality determinant (technology, population, capital stock, education), or a decrease in a resource price such as wages or energy prices. Whatever the cause, an increase in short-run aggregate supply is seen as a rightward shift of the short-run aggregate supply curve. To illustrate this shift, click the [SRAS Increase] button. This shift generates a new short-run equilibrium at a lower price level (9), and an increase in the quantity of real production ($110 billion). As expected, the price level decreases and real production increases.

  • Aggregate Supply Decrease: A decrease in short-run aggregate supply can be caused by a decrease in any resource quantity or quality determinant (technology, population, capital stock, education), or an increase in a resource price such as wages or energy prices. Whatever the cause, a decrease in short-run aggregate supply is seen as a leftward shift of the short-run aggregate supply curve. To illustrate this shift, click the [SRAS Decrease] button. This shift generates a new short-run equilibrium at a higher price level (11), and a decrease in the quantity of real production ($90 billion). As expected, the price level increases and real production decreases.

<= AGGREGATE MARKET ANALYSISAGGREGATE SUPPLY =>


Recommended Citation:

AGGREGATE MARKET SHOCKS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: June 21, 2018].


Check Out These Related Terms...

     | aggregate demand increase, short-run aggregate market | aggregate demand decrease, short-run aggregate market | aggregate supply increase, short-run aggregate market | aggregate supply decrease, short-run aggregate market | aggregate demand increase, long-run aggregate market | aggregate demand decrease, long-run aggregate market | aggregate supply increase, long-run aggregate market | aggregate supply decrease, long-run aggregate market |


Or For A Little Background...

     | aggregate market | aggregate market analysis | long-run aggregate market | short-run aggregate market | equilibrium, aggregate market | equilibrium, long-run aggregate market | equilibrium, short-run aggregate market | aggregate demand | aggregate supply | aggregate expenditures | long-run aggregate supply | short-run aggregate supply | aggregate demand curve | long-run aggregate supply curve | short-run aggregate supply curve | price level | GDP price deflator | real gross domestic product | market adjustment | demand shock | supply shock |


And For Further Study...

     | disequilibrium, aggregate market | disequilibrium, long-run aggregate market | disequilibrium, short-run aggregate market | output gaps | recessionary gap | inflationary gap | aggregate market shocks | self correction, aggregate market | self correction, recessionary gap | self correction, inflationary gap | Keynesian economics | monetary economics | classical economics |


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