CHAPTER 27 Aggregate Supply and Aggregate Demand PowerPoint® Slides by Can Erbil © 2005 Worth Publishers, all rights reserved

2 What you will learn in this chapter: How the aggregate supply curve illustrates the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy Why the aggregate supply curve different in the short run compared to the long run How the aggregate demand curve illustrates the relationship between the aggregate price level and the quantity of aggregate output demanded in the economy How the AS–AD model is used to analyze economic fluctuations How monetary policy and fiscal policy can stabilize the economy

3 The Short-Run Aggregate Supply Curve

4 Shifts of the Short-Run Aggregate Supply Curve

5 Changes in  Commodity prices  Nominal wages  Productivity

6 Long-Run Aggregate Supply Curve

7 Actual and Potential Output

8 Economic Growth Shifts the LRAS Curve Rightward

9 From the Short Run to the Long Run

10 The Aggregate Demand Curve

11 Why is the aggregate demand curve downward- sloping?  Wealth effect of a change in the aggregate price level  Interest rate effect of a change in aggregate the price level

12 Shifts of the Aggregate Demand Curve Changes in  Expectations  Wealth  Stock of physical capital

13 Shifts of the Aggregate Demand Curve

14 The Multiplier The size of the multiplier, 1/1 – MPC, depends on the marginal propensity to consume, MPC: the larger the MPC, the larger the change in real GDP for any given autonomous increase in aggregate spending.

15 The Multiplier

16 The AS–AD Model

17 Shifts of the SRAS Curve

18 Shifts of Aggregate Demand: Short-Run Effects

19 Long-Run Macroeconomic Equilibrium

20 Short-Run Versus Long-Run Effects of a Negative Demand Shock

21 Short-Run Versus Long-Run Effects of a Positive Demand Shock

22 Negative Supply Shocks

23 Macroeconomic Policy  Fiscal policy affects aggregate demand directly through government purchases and indirectly through changes in taxes or government transfers that affect consumer spending.  Monetary policy affects aggregate demand indirectly through changes in the interest rate that affect consumer and investment spending.

24 The End of Chapter 27 coming attraction: Chapter 28: Income and Expenditure