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Aggregate Demand and Supply

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Presentation on theme: "Aggregate Demand and Supply"— Presentation transcript:

1 Aggregate Demand and Supply
Copyright ACDC Leadership 2015

2 Aggregate Demand Copyright ACDC Leadership 2015

3 What is Aggregate Demand?
Aggregate- “added all together.” When we use aggregates we combine all prices and all quantities. Aggregate Demand is all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels. The Demand for everything by everyone in the Canada. There is an inverse relationship between price level and Real GDP. If the price level: Increases (Inflation), then real GDP demanded falls. Decreases (deflation), the real GDP demanded increases. Copyright ACDC Leadership 2015

4 Aggregate Demand Curve
AD is the demand by consumers, businesses, government, and foreign countries Price Level What definitely doesn’t shift the curve? Changes in price level cause a move along the curve AD = C + I + G + Xn Real domestic output (GDPR) Copyright ACDC Leadership 2015

5 Why is AD downward sloping?
The Wealth Effect- Higher price levels reduce the purchasing power of money. This decreases the quantity of expenditures Lower price levels increase purchasing power and increase expenditures Example: If the price level doubles, people are going to buy less stuff because they have less purchasing power. So…price level goes up, GDP demanded goes down. Copyright ACDC Leadership 2015

6 Why is AD downward sloping?
2. Interest-Rate Effect- When the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. Higher interest rates discourage consumer spending and business investment. Example: An increase in prices leads to an increase in the interest rate from 5% to 25%. You are less likely to take out loans to improve your business. So…price level goes up, GDP demanded goes down. Copyright ACDC Leadership 2015

7 Why is AD downward sloping?
3. Foreign Trade Effect- When Canada price level rises, foreign buyers purchase fewer Can. goods and Canadians buy more foreign goods Exports fall and imports rise causing real GDP demanded to fall. (XN Decreases) Example: If prices triple in the Canada, US will no longer buy Canada goods causing quantity demanded of Canada products to fall. So…price level goes up, GDP demanded goes down Copyright ACDC Leadership 2015

8 Shifters of Aggregate Demand
GDP = C + I + G + (X-M) Copyright ACDC Leadership 2015

9 Shifts in Aggregate Demand
An increase in spending shift AD right, and decrease in spending shifts it left Price Level AD1 AD = C + I + G + (X-M) AD2 Real domestic output (GDPR) 9 Copyright ACDC Leadership 2015

10 Shifters of Aggregate Demand
Change in Consumer Spending Increase in Disposable Income (Higher incomes…) Consumer Expectations (People fear a recession…) Household Indebtedness (More consumer debt…) Taxes (Decrease in income taxes…) 2. Change in Investment Spending Real Interest Rates (Price of borrowing $) (If interest rates increase…) (If interest rates decrease…) Future Business Expectations (High expectations…) Productivity and Technology (New robots…) Business Taxes (Higher corporate taxes means…) Copyright ACDC Leadership 2015

11 Shifters of Aggregate Demand
Change in Government Spending Government Expenditures (Decrease in defense spending…) (Increase in public works programs…) Change in Net Exports (X-M) Exchange Rates (If the us dollar depreciates relative to the euro…) National Income Compared to Abroad (If a major importer has a recession…) (If the US has a recession…) If dollar depreciates, more Europeans will buy US products causing Net Exports to increase AD = GDP = C + I + G + (X-M) 11 Copyright ACDC Leadership 2015

12 Aggregate Supply Copyright ACDC Leadership 2015

13 What is Aggregate Supply?
Aggregate Supply is the amount of goods and services (real GDP) that firms will produce in an economy at different price levels. Copyright ACDC Leadership 2015

14 AS is the production of all the firms in the economy
Aggregate Supply Price Level AS AS is the production of all the firms in the economy Real domestic output (GDPR) 14 Copyright ACDC Leadership 2015

15 Shifters Aggregate Supply

16 Shifts in Aggregate Supply
An increase or decrease in national production can shift the curve right or left AS2 Price Level AS AS1 Real domestic output (GDPR) 16 Copyright ACDC Leadership 2015

17 Shifters of Aggregate Supply
1. Change in Resource Prices Prices of Domestic and Imported Resources (Increase in price of Canadian lumber…) (Decrease in price of Chinese steel…) Supply Shocks (Negative Supply shock…) (Positive Supply shock…) Inflationary Expectations (If people expect higher prices in the future…) If producers expect higher prices in the future, workers will demand higher wages and costs will increase. This will decrease AS 17 Copyright ACDC Leadership 2015

18 Shifters of Aggregate Supply (NOT Government Spending)
2. Change in Actions of the Government (NOT Government Spending) Taxes on Producers (Lower corporate taxes…) Subsidies for Domestic Producers (Lower subsidies for domestic farmers…) Government Regulations (EPA inspections required to operate a farm…) 3. Change in Productivity Technology (Computer virus that destroy half the computers…) (The advent of a teleportation machine…) 18 Copyright ACDC Leadership 2015


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