1. Aggregate Demand and Aggregate Supply
Lesson 27
Sections 17, 18, 19

2. Aggregate Demand (17)
The Aggregate Demand Curve is also downward sloping, but not for the same reasons as the single demand curve.
Wealth Effect
Rise in prices reduces buying power
Interest Rate Effect
A rise prices causes people to invest less and borrow more to maintain purchasing power, but this reduces the loan-able amount causing interest rates to rise

3. Shifts in Aggregate Demand
Changes in Expectations
Changes in Wealth
Size of Existing Stock of Physical Capital
Government Policies and Aggregate Demand
Fiscal Policy
Monetary Policy

4. Aggregate Supply (18) Short Run Aggregate Supply Curve
Costs: Wages
Nominal Wages
Sticky Wages
Shifts in Short Run Aggregate Supply
Changes in Commodity Prices
Changes in Nominal Wages
Changes in Productivity

5. Long Run Aggregate Supply Curve
Potential Output
Shifts in Long Run Aggregate Supply
Increase in resources
Land
Labor
Capital
Increase in quality of resources (educated workforce)
Technological progress
Quantity of
Output Y
1980 AD
1990
Aggregate
Demand,
2000
Price
Level
Long-run
aggregate
supply,
LRAS P
1. In the long run,
technological
progress shifts
long-run aggregate
supply . . .
and
ongoing inflation.
leading to growth
in output . . .
and growth in the
money supply shifts
aggregate demand . . .

6. The AD – AS Model Short-Run Macroeconomic Equilibrium
Shifts of Aggregate Demand: Short Run Effects
Demand Shock
Negative and Positive
Supply Shock
Stagflation

7. Long-Run Macroeconomic Equilibrium
Long-Run Aggregate Supply
Potential Output
GDP, potential GDP
Negative Demand Shock Effects
1 Initial Negative Demand Shock
2 Reduce Aggregate Price Level (higher unemployment in the short run)
3 Drop in nominal wages leads to increase in short run aggregate supply moving the economy back to potential output
Recessionary Gap

8. Positive Demand Shock Positive Demand Shock Inflationary Gap
1 Demand increases
2 Aggregate prices and output increases reducing unemployment
3 nominal wages rise, reducing short run aggregate supply to the long range output
Inflationary Gap
Output Gap
[(Actual-Potential)/Potential]x100
Self-correcting?