1. Aggregate Demand

2. **Assumes a constant Money Supply**
Aggregate Demand is:
A schedule, graphically represented as a curve, which shows the various amounts of goods and services--the amounts of real domestic output--which domestic consumers, businesses, governments, and foreign buyers collectively will desire to purchase at each possible price level
**Assumes a constant Money Supply**

3. Price Level AD
Real Domestic Output (Real GDP)
Less Domestic output will be produced and purchased at higher price levels and visa-versa

4. Determinants of A.D.
Wealth Effect--different price levels either increase or decrease the purchasing power of accumulated assets
Interest Rate Effect--different interest rates (due to different price levels) will either increase or decrease consumption of domestic output
Foreign Purchases Effect--different price levels will either increase or decrease foreign purchases of domestic output (net exports)

5. Factors that Shift Aggregate Demand
Changes in Consumer Spending -- Consumer Wealth Consumer Expectations -- Consumer Indebtedness -- Taxes (Changes in...)

6. Factors that Shift Aggregate Demand
Changes in Investment Spending (Business)
Interest Rates
Profit expectations on investment projects
Business Taxes
Technology
Degree of Excess Capacity

7. Factors that Shift Aggregate Demand
Change in Government Spending -- New national spending priorities -- Budgetary cutbacks
Change in Net Export Spending -- National income abroad -- Exchange Rates

8. Price Level
AD+ AD
AD-
Real Domestic Output (Real GDP)

9. Examples:
Higher consumer indebtedness from past spending will curtail current spending causing AD to shift left.
Increases in Business taxes will curtail current investment spending causing AD to shift left (inward).
Depreciation of the $dollar will cause foreign currencies to be more valuable, increasing exports, decreasing imports. AD will shift right (outward)

10. Examples (Cont’d):
Decreases in interest rates, caused by changes in the money supply, will increase consumer spending and investment shifting the AD curve to the right.
Government cutbacks in purchases (e.g. military budget) will result in lower government spending, shifting AD curve to the left
New technology stimulates investment spending, shifting AD to the right.,

11. Aggregate Supply

12. Aggregate Supply
A schedule, graphically represented by a curve, showing the level of real domestic output (GDP) available at each possible price level

13. Real Domestic Output (GDP)AS
Classical Range
Price Levels
Intermediate Range
Keynesian Range
Real Domestic Output (GDP)

14. Aggregate Supply: Keynesian Range
GDP levels in this range indicate unused or idle resources
GDP levels in this range implies economic contraction with accompanying unemployment
GDP output can be increased due to idle resources without an increase in price levels, resulting in horizontal AS.

15. Aggregate Supply: Intermediate Range
Increases in Real GDP are accompanied by increases in price levels
Uneven expansion in different product and factor markets results in increases in price levels in some market segments but not others
“Bottlenecks” in labor and capital use result in uneven price level increases in different market segments.

16. Aggregate Supply: Classical Range
At some specific level of GDP output, productive capacity is fully utilized.
Because economy is at a level of full employment and productive capacity, higher price levels will not result in greater production.

17. Factors that Shift Aggregate Supply
Change in Input Prices
Resource availability and prices
Market Power of resource providers
Labor Unions
Monopoly resource owners
Changes in Productivity
Changes in Legal-Institutional Environment
Business Taxes and Subsidies
Government regulation

18. Real Domestic Output (GDP)
AS- AS
AS+
Decreased AS
Price Levels
Increased AS
Real Domestic Output (GDP)

19. Classical Theory Jean-Baptiste Say (1767-1832)
Assumes highly competitive marketplace with little or no government interaction
Assumes natural state of equilibrium at full employment
Say’s Law: Supply creates its own Demand
Predominant economic theory until 1930’s

20. Keynesian Theory
John Maynard Keynes: The General Theory of Prices and Equilibrium
There is no “natural” balance in the economy
Aggregate Demand is the primary influence on employment and price levels.
Advocated use of “Fiscal Policy” by government to adjust equilibrium toward full employment
Fiscal Policy is the use of government taxing and spending authorities to achieve economic goals.

21. Monetary Theory (Monetarism)
Milton Friedman (Nobel Prize)
The supply of money in the economy will affect interest rates therefore investment, and consumption.
Too much $$ results in inflation; too little in unemployment.
Advocated a balance between $$ supply and economic productivity and less gov’t involvement

22. Monetarist Model S S’
money
Interest Rate D Q1 Q2
Quantity of Money

23. Neo-Classical (Supply-Side)
Gained prominence during 1970’s “Stagflation” a.k.a. “Voodoo Economics”(G.Bush)
Re-focus on Aggregate Supply
Advocated:
Lower Taxes on business and investors
Increased privatization of gov’t programs
Decreased regulation of business
Stagflation = high inflation with high unemployment

24. Supply-Side Model
AS1 FE
AS2
Price Level AD
GDP
FE= Full Employment