1. ECO 102 Macroeconomics Chapter 3 Aggregate Demand and Aggregate Supply
Prof. Dr. Magdy El-Shourbagui
Head of the Department of Economics
College of Business & Economics
Misr University for Science & Technology

2. Learning Objectives
Define the following terms: aggregate demand, aggregate supply, economy’s potential real GDP, and macroeconomic equilibrium.
Distinguish between the aggregate demand curve and the aggregate supply curve.
Identify and describe the reasons for downward slope of the aggregate demand curve.
Identify and describe the factors that shift the aggregate demand curve.
Explain and illustrate graphically the macroeconomic equilibrium in the short run

3. Real GDP = Y = AD = C + I + G + NX
The Meaning of Aggregate Demand
Aggregate Demand, AD is the quantity demanded of all final goods and services (Real GDP) at different price levels. AD can be calculated by the following equation:
Real GDP = Y = AD = C + I + G + NX
= C + I + G + (X -M)
Where:
C = personal consumption spending,
I = gross private domestic spending,
G = government spending,
NX = net exports of goods and services,
X = exports of goods and services, and
M = imports of goods and services.

4. The Aggregate Demand Curve
The Aggregate demand, AD curve is downward-sloping, specifying a negative relationship between the price level as independent variable and the quantity of real GDP demanded as dependent variable.

5. The price level and investment (The interest rate effect), and
Reasons for Downward slope of the Aggregate Demand Curve
The price level and consumption (The Real wealth effect or the real money balance effect),
The price level and investment (The interest rate effect), and
The price level and net exports (The international trade effect).

6. 1. The price level and consumption (The Real wealth effect or the real money balance effect),
Real Wealth is the value of money in bank, bonds, stocks, and non-monetary assets people own measured in terms of what they will buy.
the real purchasing power of money balances (currency and bank deposits) and the real, monetary wealth
The price level
real wealth.
consumers feel wealthier
encourages them to spend more
quantity demanded of Real GDP
quantity of goods and services demanded

7. 2. The Price Level and Investment (The Interest Rate Effect)
money needed to buy fixed bundle of goods and services
the purchasing power of money
the domestic saving
the interest rate
supply of credit
the banks will provide more loans
spending on investment goods by households and businesses

8. the domestic goods will be cheaper relative to foreign goods
3. The Price Level and Net Exports (The International Trade Effect)
the domestic goods will be cheaper relative to foreign goods
Exports (X) and
Imports (M)
Net Exports (NX)

9. A Change in the Quantity Demanded of the Real GDP: A Movement along the Aggregate Demand Curve
A change in the quantity demanded of real GDP caused by a change in the price level. It is shown by a movement along the aggregate demand curve

10. A Change in Aggregate Demand: Shifts in the Aggregate Demand Curve
A Change in aggregate demand is the change in the quantity demanded of real GDP as the change in the following factors: Consumption, investment, government spending, and net exports. These factors will affect the quantity demanded of real GDP at any given price level.
The aggregate demand curve shifts, when one of the factors above changes.

11. An Increase in Aggregate Demand
An increase in aggregate demand is represented by an outward shift of the entire aggregate demand curve. If aggregate demand increases, greater quantities of real GDP are demanded at each possible price level for the year.

12. A Decrease in Aggregate Demand
A decrease in aggregate demand is represented by an inward shift of the entire aggregate demand curve. When aggregate demand decreases, a less quantity of real GDP is demanded at each possible price level for the year.

13. Factors that shift the Aggregate Demand Curve
The aggregate demand curve will shift as a result of changes in the following:
Consumption Spending (C);
Investment Spending (I);
Government Spending (G); and
Net Exports (NX).
The AD curve shifts to the right side when aggregate demand increases. However, the AD curve shifts to the left side when aggregate demand decreases.

14. aggregate demand curve
Factors that shift the Aggregate Demand Curve
1. Consumption Spending (C)
The following factors can cause consumption spending to change:
a) Consumer Wealth;
b) Personal Income Taxes; and
c) Expectations about Future Income, and Inflation.
a) Consumer Wealth
Consumer Wealth
demand for goods
and services
by consumers
consumers feel wealthier
Consumption
Spending
( C )
rightward shift of the
aggregate demand curve
aggregate
demand

15. aggregate demand curve
Factors that shift the Aggregate Demand Curve
b) Personal Income Taxes
personal income tax
disposable income of households
Consumption
Spending
( C )
rightward shift of the
aggregate demand curve
aggregate
demand

16. Factors that shift the Aggregate Demand Curve
c) Expectations about Future Income, and Inflation
the amount of consumption goods that people plan to buy today
expected future income
rightward shift of the
aggregate demand curve
Consumption
Spending
( C )
aggregate
demand
buying goods and services
cheaper today
A increase in expected inflation
Consumption
Spending
( C )
rightward shift of the
aggregate demand curve
aggregate
demand

17. aggregate demand curve
Factors that shift the Aggregate Demand Curve
2. Investment Spending (I)
The following factors can cause investment spending to change:
a) Interest Rates;
b) Corporate Profits Taxes; and
c) Expectations about Future Sales.
a) Interest Rates
The interest rates
borrowing by investors
Investment
Spending
( I )
rightward shift of the
aggregate demand curve
aggregate
demand

18. aggregate demand curve
Factors that shift the Aggregate Demand Curve
b) Corporate Profits Taxes
Taxes on profits of firms
firms after-tax profits
Investment
Spending
( I )
rightward shift of the
aggregate demand curve
aggregate
demand

19. aggregate demand curve
Factors that shift the Aggregate Demand Curve
c) Expectations about Future Sales
Expected future sales
profits expectations
Investment
Spending
( I ) today
rightward shift of the
aggregate demand curve
aggregate
demand

20. 3. Government Spending (G)
Factors that shift the Aggregate Demand Curve
3. Government Spending (G)
An increase in government purchases of goods and services increases aggregate demand. This shifts the aggregate demand curve to the right
4. Net Exports (NX)
The following factors can cause net exports to change:
a) Foreign Real Income; and
b) Foreign Exchange Rate.

21. (Real GDP of foreign countries) aggregate demand curve
Factors that shift the Aggregate Demand Curve
a) Foreign Real Income
Foreign real income
(Real GDP of foreign countries)
The exports
of the home country
rightward shift of the
aggregate demand curve
aggregate
demand
AD = C + I + G + X - M

22. Factors that shift the Aggregate Demand Curve
b) Foreign Exchange Rate
The prices of domestic
goods and services
relative to foreign goods and services
Foreign exchange rate
(price of foreign currency )
Exports and
Imports
Net exports
rightward shift of the
aggregate demand curve
aggregate
demand

23. The Meaning of Aggregate Supply
Aggregate supply, AS is the quantity supplied of all final goods and services (Real GDP) at different price levels. ). This is represented by the aggregate production function:
Y = f (N, K, L, T)
Where:
Y = The aggregate supply (Real GDP);
f = depends on;
N = Labor;
K = Capital;
L = Land;
T = The State of Technology.

24. The short-Run Aggregate Supply Curve
The Short-Run Aggregate Supply, SRAS curve is upward-sloping, specifying a positive relationship between the price level as independent variable and the quantity supplied of real GDP as dependent variable.

25. 3.2.2.2 The Long-Run Aggregate Supply Curve Page 75
till
Figure 3.11: A Change in Aggregate Supply in the Short-Run: Shifts of the Short-Run Aggregate Supply Curve page 81
and
3.3.2 Long-Run Macroeconomic Equilibrium page 82

26. 1 Short-Run macroeconomic Equilibrium
When the quantity demanded of real GDP equals the quantity supplied of real GDP, the Short-Run macroeconomic equilibrium occurs
The short-run equilibrium point (n) is the interaction of the AD curve and SRAS curve. This intersection determines the equilibrium price level (Pe) and the equilibrium real GDP (Ye).