1. Aggregate Demand and Supply
The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level.
The aggregate-supply curve shows the quantity of goods and services that firms choose to produce and sell at each price level.

2. Why the Aggregate Demand Curve Slopes Downward (1)
Aggregate demand (AD) is the economy-wide demand for goods and services.
Like the market demand curve, the aggregate demand curve slopes downward, but for different reasons.
The reasons for its downward slope are price-level effects:
Wealth Effect (Real Wealth/Real Balances)
Interest Rate Effect
International Trade Effect (Substitution)
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Pigou's Wealth Effect
A drop in the price level induces consumers to spend more, thereby increasing the aggregate demand.
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4. The Interest Rate Effect
A drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand.
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5. Mundell-Fleming's Exchange-Rate Effect
A lower price level in an economy reduces the prices of its goods and services relative to foreign-produced goods and services. A lower price level makes that economy’s goods more attractive to foreign buyers, increasing exports
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6. Figure 3 The Aggregate-Demand Curve...
Price
Level
Aggregate
demand P Y
1. A decrease
in the price
level . . . Y2 P2
Quantity of
increases the quantity of
goods and services demanded.
Output
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7. Components of the Aggregate Demand
The four components of GDP (Y) contribute to the aggregate demand for goods and services.
Y = C + I + G + NX

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Factors that Affect AD
AD = C + I + G + XN
Consumption
Income
Wealth
Expectations
Demographics
Taxes
Investment
Interest Rates
Technology
Cost of Capital Goods
Capacity Utilization
Government Spending
Net Exports
Domestic & Foreign Income
Domestic & Foreign Prices
Exchange Rates
Government Policy
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9. Shifting the Aggregate Demand Curve
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10. Reasons for Shift In AD Shift arising from Changes in Consumption
Shifts Arising from Changes in Investment
Shifts Arising from Changes in Government
Purchases
Shifts Arising from Changes in Net Exports

11. Shifting the Aggregate Demand Curve
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12. Aggregate Supply
Aggregate supply is the total supply of all goods and services in the economy.
The aggregate supply (AS) curve is a graph that shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level.

13. Determinants of Aggregate Supply
Resource prices
Technology
Expectation of future prices

14. Determinants of Aggregate Supply (1)
Resource Prices
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15. Determinants of Aggregate Supply (2)
Technology
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16. Determinants of Aggregate Supply (3)
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Aggregate Supply
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18. Why Aggregate Supply curve slopes upward
Sticky Wage theory
Sticky Price Theory

19. Short-run Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves.
It shows the quantity of real GDP produced at different price levels.
Short-run AS slopes upward because an increase in the price level (while production costs and capital are held constant on the short-run), means higher profit margins—firms will want to produce more.
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20. Changes in Short-Run Aggregate Supply
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21. Factors that shift the Aggregate Supply Curve
deregulation
Bad weather, natural disasters, destruction b/ wars
Good weather
Public policy
waste and inefficiency
supply-side policies
over-regulation
tax cuts
Capital deterioration
more capital
more labor
higher input prices
lower input prices
higher wage rates
lower wage rates
Factors That Shift the Aggregate Supply Curve
Shifts to the Left Decreases in Aggregate Supply
Shifts to the Right Increases in Aggregate Supply
technological change
Stagnation
Economic growth
Higher costs
Lower costs

22. The Shape of the Long-Run Aggregate Supply Curve
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23. Shift in Long Run Aggregate supply
LRAS
LRAS
Price Level
Decrease
Increase
Real GDP

24. Shift in long run aggregate supply curve
Changes in the supply of labor, due to immigration
Changes in technological knowledge
Changes in the stock of capital, physical or human
Discoveries or depletion of stocks of natural resources
Changes in natural rate of unemployment, due to changes in minimum wages

25. Macroeconomic Equilibrium
An economy is at a state of equilibrium when the quantity of goods and services supplied in an economy equals the quantity of goods and service demanded in it. The price level where aggregate supply equals aggregate demand is called the equilibrium price.
Short Run Equilibrium
Long Run Equilibrium

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Short Run Equilibrium
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27. The Long-Run Equilibrium
Price
Level
Long-run
aggregate
supply
Short-run
aggregate
supply
Aggregate
demand A
Equilibrium
price
Natural rate
of output
Quantity of
Output
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28. Demand side Management