Chapter 11- Aggregate Demand/Aggregate Supply 4/9/2019 Chapter 11- Aggregate Demand/Aggregate Supply Objective – Students will be able to answer questions regarding the AD/AS model. SECTION 1 © 2001 by Prentice Hall, Inc.

The AS/AD Model The equilibrium of AS & AD determines current output (GDPR) and the price level (PL) LRAS SRAS PL P AD YF GDPR

Full Employment Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point. LRAS SRAS PL P AD YF GDPR

Recessionary Gap A recessionary gap exists when equilibrium occurs below full employment output. SRAS LRAS PL P AD Y YF GDPR

Inflationary Gap An inflationary gap exists when equilibrium occurs beyond full employment output. LRAS SRAS PL P AD YF Y GDPR

Changes (Δ) in AD Δ Consumption (C) C↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ C↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ Δ Gross Private Investment (IG) IG↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ IG↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ Δ Government Spending (G) G↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ G↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ Δ Net Exports (XN) XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

Practice Problem Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there is an increase in government spending.

C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ Increase in AD SRAS LRAS PL  P1  P AD1 AD  Y YF GDPR C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ Decrease in AD LRAS PL SRAS  P  P1 AD AD1  YF Y GDPR C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

Section 1 Assessment Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there is a decrease in net exports. 2. Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there is an increase in gross private investment.

Summary: In a paragraph, describe what you have learned today.