1. Unit 3: Aggregate Demand and Supply and Fiscal Policy1

2. Shifters of Aggregate Demand Shifters of Aggregate Supply
AD = C + I + G + Xn
Change in Consumer Spending
Change in Investment Spending
Change in Government Spending
Change in Net EXport Spending
Shifters of Aggregate Supply
AS = R + A + P
Change in Resource Prices
Change in Actions of the Government
Change in Productivity

3. Putting AD and AS together to get Equilibrium Price Level and Output

4. Use the AD and AS model to show an economy at full employment output
LRAS
Price Level AS
PLe AD QY
GDPR 4

5. #1. Assume there is an increase in consumer spending
#1. Assume there is an increase in consumer spending. What happens to PL and output in the short- run?
LRAS
Price Level AS
PL and Q will Increase
PL1
PLe
AD1 AD QY Q1
GDPR 5

6. Practice An increase in consumer spending
The impact on net exports when a trading partner has a recession
A significant increase in the price of oil that affects the resource costs of businesses
Government increases spending but not taxes
Increase in wages that businesses pay workers
Effect on businesses when they expect inflation
Effect on investment when interest rates decrease
An increase in productivity
The impact on next exports when the country’s currency depreciates
Government increases corporate taxes 6 6

7. Practice
AD or AS
Shifter
Increase or Decrease 1 2 3 4 5 6 7 8 9 10

8. Practice AD or AS Shifter Increase or Decrease 1 AD C Increase 2 X3 AS R 4 G 5 6 7 I 8 P 9 10 A

9. Inflationary and Recessionary Gaps9

10. The economy can only be in one of three places at any time
Max Capacity
0% Unemployment
Real GDP
Capital Goods
Real
GDP
Consumer Goods
Time
Recessionary Gap
Full Employment
5% Unemployment
Full Employment
Inflationary Gap 10

11. Example: Assume the government increases spending
Example: Assume the government increases spending. What happens to PL and Output?
LRAS
Price Level AS
PL and Q will Increase
PL1
PLe
AD1 AD QY Q1
GDPR 11

12. Inflationary Gap Output is high and unemployment is less than NRU LRAS
Price Level AS
Actual GDP above potential GDP
PL1
AD1 QY Q1
GDPR 12

13. Example: Assume consumer spending falls. What happens to PL and Output?
LRAS
Price Level AS
PL and Q will decrease
PLe
PL1 AD
AD1 Q1 QY
GDPR 13

14. Recessionary Gap Output low and unemployment is more than NRU LRAS
Price Level AS
Actual GDP below potential GDP
PL1
AD1 Q1 QY
GDPR 14

15. Stagnate Economy + Inflation Still considered recessionary gap
Example: If there is a negative “supply shock” of oil. What happens to PL and Output?
LRAS
Price Level
AS1 AS
Stagflation
Stagnate Economy + Inflation
PL1
PLe
Still considered recessionary gap AD Q1 QY
GDPR 15

16. A

17. 2008 Audit Exam C

18. 2008 Audit Exam D

19. 2008 Audit Exam E

20. 2012 Exam E