1. Macroeconomic Equilibrium (AD/AS)

2. Aggregate demand and supply
Aggregate demand – a relationship between the price level and the equilibrium quantity of real GDP demanded.
Aggregate supply – a relationship between the price level and the equilibrium quantity of real GDP supplied.

3. Macroeconomic equilibrium

4. Demand-pull inflation
Demand-pull inflation is caused by an increase in AD

5. Business cycle expansion
As AD rises, output rises, and unemployment falls

6. Business cycle contraction
As AD falls, output falls and unemployment rises

7. Cost-push inflation
Cost-push inflation is caused by a reduction in AS.

8. Stagflation
Rising prices and falling output

9. Aggregate demand Aggregate demand (AD) consists of spending on GDP by:
consumers (C)
firms (I)
the government (G), and
the foreign sector (X)
Anything that increases C, I, G, or X at a given price level results in an increase in AD.

10. Factors affecting Consumption
Income
Wealth
Expected future income and wealth
Demographics
Taxes

11. Factors affecting Investment
Interest rate
Technology
Cost of capital goods
Capacity utilization

12. Government spending
Determined by government authorities

13. Factors affecting net exports
Foreign and domestic income
Foreign and domestic price levels
Exchange rates
Government policy (tariffs, trade restrictions, etc.)

14. Aggregate expenditures
AE = C+I+G+X
AE is affected by any factor that changes C, I, G, or X.

15. Aggregate demand
Note that AD curve is not the same as the demand curve for a particular good
negative slope is NOT the result of income and substitution effects
Why is it downward sloping?
Wealth effect
Interest rate
International trade effect

16. Wealth effect As the price level rises:
the real value of dollar-denominated assets decline (real wealth declines)
this decline in wealth results in a reduction in consumption spending
This affect is also called the real-balance effect (or Pigou effect)

17. Interest-rate effect As the price level rises:
Individuals must hold more money to pay for transactions
To acquire more money, households sell bonds, and other financial assets.
As more bonds are sold, the price of bonds declines
A decline in bond prices results in a higher rate of return (interest rate) on bonds and other financial assets
A higher interest rate results in a reduction in investment and consumption spending

18. International trade effect
As the domestic price level rises:
Imports become relatively cheaper,
Exports become relatively more expensive
Exports decline, imports rise, and net exports decline

19. Combined price-level effects
As the price level rises, AE falls due to the combined wealth, interest-rate, and international trade effects

20. Nonprice determinants of AD
Anything that changes C, I, G, or X at a given price level will cause the AD curve to shift
Effects of:
Expectations (consumer and investor confidence)
Foreign income and price levels
Government policy

21. Aggregate supply Price-level effects
Assumption: Resource prices adjust more slowly than output prices
As price level rises, production becomes more profitable and the quantity of output supplied rises.

22. Aggregate supply

23. Short-run Aggregate Supply

24. Long-run Aggregate Supply
Resource and output prices are assumed to be flexible in the long run. Output = potential real GDP.

25. Changes in Short-Run AS
Resource prices
Technology
Expectations

26. Changes in Long-Run AS
Changes in the quantity and/or quality of resources
Technology

27. Macroeconomic equilibrium

28. Short-run effect of an increase in AD

29. Long-run adjustment process