1. Chapter 11- Aggregate Demand/Aggregate Supply
4/9/2019
Chapter 11- Aggregate Demand/Aggregate Supply
Objective – Students will be able to answer questions regarding the AD/AS model.
SECTION 1
© 2001 by Prentice Hall, Inc.

2. The AS/AD Model
The equilibrium of AS & AD determines current output (GDPR) and the price level (PL)
LRAS
SRAS PL P AD YF
GDPR

3. Full Employment
Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point.
LRAS
SRAS PL P AD YF
GDPR

4. Recessionary Gap
A recessionary gap exists when equilibrium occurs below full employment output.
SRAS
LRAS PL P AD Y YF
GDPR

5. Inflationary Gap
An inflationary gap exists when equilibrium occurs beyond full employment output.
LRAS
SRAS PL P AD YF Y
GDPR

6. Changes (Δ) in AD Δ Consumption (C)
C↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
C↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Δ Gross Private Investment (IG)
IG↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
IG↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Δ Government Spending (G)
G↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
G↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Δ Net Exports (XN)
XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

7. Practice Problem
Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there is an increase in government spending.

8. C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
Increase in AD
SRAS
LRAS PL  P1  P
AD1 AD  Y YF
GDPR
C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

9. C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Decrease in AD
LRAS PL
SRAS  P  P1 AD
AD1  YF Y
GDPR
C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

10. Section 1 Assessment
Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there is a decrease in net exports.
2. Graph and explain what would happen to the equilibrium PL, GDPr, u%, and π% in the short run if the economy is in full employment equilibrium and there is an increase in gross private investment.

11. Summary: In a paragraph, describe what you have learned today.