Aggregate Supply & Demand Model

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Presentation transcript:

Aggregate Supply & Demand Model Macroeconomic Analysis

AS/AD Model Purpose Allows complex analysis of macroeconomic events & the effects on: Unemployment, Inflation and GDP growth Sample analysis from AS/AD model What will happen in the Government lowers taxes What will happen in the Federal Reserve ↑ interest rates

GDP adjusted for inflation Aggregate Demand Aggregate-demand curve (AD)- the demand curve for the entire economy of U.S. made goods demand from households, firms, exports & government 4 Components of AD : AD = C + I + G + NX Inflation = Price Level AD = C + I + G + (X-M) GDP adjusted for inflation

Shifts in AD Curve Shifts arise from changes in any of the 4 Determinants of AD Consumption Investment Government Purchases Net Exports AD = C + I + G + (X-M)

Aggregate Supply Curve Aggregate-supply curve (AS)- the entire supply curve of all goods & services produced in U.S. quantity of goods & services all firms produce Price Level You use the AS/AD model to predict the impact of Gov’t policy or other economic events AS1 --------------- P1 Y1 E1 AD = C + I + G + NX AD1 Real GDP

AS/AD Model Worksheet See what you understand

Using AS/AD Model How can you improve the current economy? Price Level Real GDP AD1 AD2 Gov’t ↓ Taxes => consumer income ↑ C ↑ => AD ↑ => R-GDP ↑ -------------------- ------------------ P2 Y2 E2 --------------- P1 Y1 E1 AD = C + I + G + NX

Using AS/AD Model AS1 --------------- AD1 Price Level Real GDP E2 P1 Y1 E1