11 Aggregate Demand and Aggregate Supply C H A P T E R Click To Go To Appendix

Graphically… AGGREGATE DEMAND Defined: Aggregate Demand Curve Amounts of Real Output Buyers Collectively Desire At Each Possible Price Level Aggregate Demand Curve Down Sloping Due To: Real-Balances Effect Interest-Rate Effect Foreign Purchases Effect Graphically…

AGGREGATE DEMAND CURVE Price level AD Real domestic output, GDP

CHANGES IN AGGREGATE DEMAND Can Increase Price level AD2 AD1 Real domestic output, GDP

CHANGES IN AGGREGATE DEMAND Can Increase …or Decrease Price level AD1 AD3 Real domestic output, GDP

Change in Consumer Spending DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer Wealth Consumer Expectations Household Indebtedness Taxes Change in Investment Spending Real Interest Rates Expected Returns Expected Future Business Conditions Technology Degree of Excess Capacity Business Taxes

Government Spending Net Export Spending National Income Abroad DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending National Income Abroad Exchange Rates

AGGREGATE SUPPLY Defined: Levels of Real Domestic Output At Each Possible Price Level Long-run Supply Curve Wages and Resource Prices Match Price Level Short-run Supply Curve Wages and Resource Prices Do Not Match Price Level

AGGREGATE SUPPLY Long Run P ASLR Q Price level Long-run Aggregate Full-Employment Qf Q Real domestic output, GDP

AGGREGATE SUPPLY Short Run P AS Q Aggregate Supply Short-run Price level Full- Employment Q Qf Real domestic output, GDP

AGGREGATE SUPPLY Changes in Aggregate Supply P Q Decrease In Aggregate Price level Increase In Aggregate Supply Q Real domestic output, GDP

Domestic Resource Prices Labor Land Capital Prices of Imported Goods DETERMINANTS OF AGGREGATE SUPPLY Input Prices Domestic Resource Prices Labor Land Capital Prices of Imported Goods Market Power

Legal-Institutional Environment DETERMINANTS OF AGGREGATE SUPPLY Productivity Productivity = Total Output Total Inputs Legal-Institutional Environment Business Taxes and Subsidies Government Regulation

EQUILIBRIUM AND CHANGES IN EQUILIBRIUM P AS Price Level Equilibrium Real Output 100 a b 92 AD Q 502 510 514 Real Domestic Output, GDP

DEMAND-PULL INFLATION INCREASES IN AD: DEMAND-PULL INFLATION P AD1 AD2 AS P2 Price Level P1 Q Qf Q1 Q2 Real Domestic Output, GDP

DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT b a P1 Price Level c Q Q1 Qf Real Domestic Output, GDP

DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT Wage Contracts Morale, Effort, and Productivity Efficiency Wages Minimum Wage Menu Costs Fear of Price Wars

DECREASES IN AS: COST-PUSH INFLATION b Price Level a P1 AD1 Q Q1 Qf Real Domestic Output, GDP

INCREASES IN AS: FULL EMPLOYMENT …With Price-Level Stability P AS1 AS2 P3 b P2 P1 Price Level a AD2 AD1 Q Q1 Q2 Q3 Real Domestic Output, GDP

KEY TERMS aggregate demand-aggregate supply (AD-AS) model real-balances effect interest-rate effect foreign purchases effect determinants of aggregate demand aggregate supply long-run aggregate supply curve short-run aggregate supply curve determinants of aggregate supply productivity equilibrium price level equilibrium real output efficiency wages menu costs BACK END Copyright McGraw-Hill/Irwin, 2005

CHAPTER 11 - Appendix Derivation of the Aggregate Demand Curve RELATIONSHIP OF THE AGGREGATE DEMAND CURVE TO THE AGGREGATE EXPENDITURES MODEL Derivation of the Aggregate Demand Curve from the Aggregate Expenditures Model Illustrated…

Aggregate expenditures DERIVATION OF THE AGGREGATE DEMAND CURVE AE1 at P 1 1 AE2 at P 2 AE3 at P 3 Aggregate expenditures (billions of dollars) 2 3 Q3 Q2 Q1 3’ P3 The Aggregate Demand Can Be Constructed Price level 2’ P2 1’ P1 AD Click To Return To Presentation Q3 Q2 Q1 Real Domestic Output

Increase in Aggregate Expenditures Increase in Aggregate Demand SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE AE2 at P 1 AE1 at P 1 Aggregate expenditures (billions of dollars) Increase in Aggregate Expenditures Q1 Q2 Increase in Aggregate Demand Price level P1 AD2 Click To Return To Presentation AD1 Q1 Q2 Real Domestic Output

Any Questions? Increase in Aggregate Expenditures Increase in SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE Any Questions? AE2 at P 1 AE1 at P 1 Aggregate expenditures (billions of dollars) Increase in Aggregate Expenditures Q1 Q2 Increase in Aggregate Demand Price level P1 AD2 Click To Return To Presentation AD1 Q1 Q2 Real Domestic Output

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