1. Aggregate Demand and Supply
Chapter 22
Aggregate Demand and Supply

2. Why the Aggregate Demand Curve Slopes Downward (1)
Aggregate demand (AD) is the economy-wide demand for goods and services.
Like the market demand curve, the aggregate demand curve slopes downward, but for different reasons.
The reasons for its downward slope are price-level effects:
Wealth Effect (Real Wealth/Real Balances)
Interest Rate Effect
International Trade Effect (Substitution)
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3. Why the Aggregate Demand Curve Slopes Downward (2)
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4. The Interest Rate Effect
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5. Why the Aggregate Demand Curve Slopes Downward (4)
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6. The Aggregate Demand Curve
Note that changes in prices result in changes in the aggregate quantity demanded.
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7. Factors that Affect AD AD = C + I + G + XN Consumption
Income
Wealth
Expectations
Demographics
Taxes
Investment
Interest Rates
Technology
Cost of Capital Goods
Capacity Utilization
Government Spending
Net Exports
Domestic & Foreign Income
Domestic & Foreign Prices
Exchange Rates
Government Policy
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8. Non-price Determinants: Changes in Aggregate Demand (1)
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9. Nonprice Determinants: Changes in Aggregate Demand (2)
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10. Non-price Determinants: Changes in Aggregate Demand (3)
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11. Shifting the Aggregate Demand Curve
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12. Effects of a Change in Aggregate Demand
Demand-pull inflation: rapid increases in AD outpace the growth of AS, causing price level increases (inflation).
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13. Short-run Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves.
It shows the quantity of real GDP produced at different price levels.
Short-run AS slopes upward because an increase in the price level (while production costs and capital are held constant on the short-run), means higher profit margins—firms will want to produce more.
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14. Aggregate Supply
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15. Shape of Short-run AS (SRAS)
In the short-run, the capital stock (the number of factories and machines, etc.) are held constant.
Increasing the number of workers increases output, but at a diminishing rate.
Diminishing returns manifest as an ever-steeper SRAS curve.
In the short-run, some prices do not adjust quickly:
Labor Costs (wages)
Contracted supplies
“Sticky” prices effect the short-run equillibrium
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16. The Shape of the Short-Run Aggregate Supply Curve
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17. The Shape of Long-run AS (LRAS)
Resource costs are NOT fixed.
As prices rise, workers will want higher wages and will eventually get them.
The amount of capital is not fixed—firms can build new plants and buy new equipment over the long-run.
In the long-run, AS is set by the production possibilities curve—the capacity of the economy, and is not affected by prices, hence is vertical.
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18. The Shape of the Long-Run Aggregate Supply Curve
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19. Determinants of Aggregate Supply (1)
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20. Determinants of Aggregate Supply (2)
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21. Determinants of Aggregate Supply (3)
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22. Shifting the Long-Run Aggregate Supply Curve
Growth occurs as the labor force and the capital stock grow, as technological innovation improves production efficiency.
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23. Changes in Short-Run Aggregate Supply
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24. Effects of a Change in Aggregate Supply
Cost-push inflation: cost increases push AS to the left (relative to AD), causing price level increases (inflation).
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25. Aggregate Demand and Aggregate Supply Equilibrium
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26. Aggregate Demand and Supply Equilibrium
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33. Economic Insight: OPEC and Aggregate Supply
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