Aggregate Demand and Aggregate Supply 29 Aggregate Demand and Aggregate Supply Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Real GDP desired at each price level Inverse relationship Aggregate Demand Real GDP desired at each price level Inverse relationship Real balances effect Interest effect Foreign purchases effect LO1 29-2

Aggregate Demand Price level AD Real domestic output, GDP LO1 29-3

Changes in Aggregate Demand Price level AD2 AD1 AD3 Real domestic output, GDP LO1 29-4

Consumer expectations Personal taxes Consumer Spending Consumer wealth Household borrowing Consumer expectations Personal taxes LO1 29-5

Expectations about future business conditions Technology Investment Spending Real interest rates Expected returns Expectations about future business conditions Technology Degree of excess capacity Business taxes LO1 29-6

Government spending increases Aggregate demand increases (as long as interest rates and tax rates do not change) More transportation projects Government spending decreases Aggregate demand decreases Less military spending LO1 29-7

National income abroad Exchange rates Dollar depreciation Net Export Spending National income abroad Exchange rates Dollar depreciation Dollar appreciation LO1 29-8

Total real output produced at each price level Aggregate Supply Total real output produced at each price level Relationship depends on time horizon Immediate short run Short run Long run LO2 29-9

Aggregate Supply: Short Run AS Aggregate supply (short run) Price level Qf Real domestic output, GDP LO2 29-10

Aggregate Supply: Long Run ASLR Price level Long-run aggregate supply Qf Real domestic output, GDP LO2 29-11

Changes in Aggregate Supply Determinants of aggregate supply Shift factors Collectively position the AS curve Changes raise or lower per-unit production costs LO2 29-12

Domestic resource prices Labor Capital Land Input Prices Domestic resource prices Labor Capital Land Prices of imported resources Imported oil Exchange rates LO2 29-13

Legal-Institutional Environment Legal changes alter per-unit costs of output Taxes and subsidies Extent of government regulation LO2 29-14

Changes in Aggregate Supply AS3 AS1 AS2 Price level Real domestic output, GDP LO2 29-15

Real domestic output, GDP Equilibrium Real domestic output, GDP (billions of dollars) Price level (index numbers) Real Output Demanded (Billions) Price Level (Index Number) Real Output Supplied $506 108 $513 508 104 512 510 100 96 507 514 92 502 AS 100 92 a b AD 502 510 514 LO3 29-16

Increases in AD: Demand-Pull Inflation Price level P1 AD2 AD1 Qf Q1 Q2 Real domestic output, GDP LO4 29-17

Decreases in AD: Recession b Price level P1 a P2 c AD1 AD2 Q1 Q2 Qf Real domestic output, GDP LO4 29-18

Decreases in AS: Cost-Push Inflation b P2 Price level a P1 AD Q1 Qf Real domestic output, GDP LO4 29-19