1. Slide 10-1 Spending and Total Expenditures Aggregate Demand –The total of all planned expenditures in the economy Aggregate Supply –The total of all planned production in the economy

2. Slide 10-2 Spending and Total Expenditures Questions –What determines the total amount that individuals, governments, firms, and foreigners want to spend? –What determines the equilibrium price level?

3. Slide 10-3 The Aggregate Demand Curve Aggregate Demand Curve –A curve showing planned purchase rates for all goods and services in the economy at various price levels, all other things held constant Aggregate demand = C + I + G + X

4. Slide 10-4 The Aggregate Demand Curve Real GDP per Year ($ trillions) Price Level 890 120 AD 100 140 67111210 A As the price level rises, real GDP demand declines

5. Slide 10-5 The Aggregate Demand Curve Real GDP per Year ($ trillions) Price Level 890 120 AD A 100 140 67111210 B

6. Slide 10-6 The Aggregate Demand Curve Real GDP per Year ($ trillions) Price Level 890 120 AD A 100 140 67111210 B C Figure 10-4

7. Slide 10-7 The Aggregate Demand Curve What happens when the price level rises? –The Real-Balance Effect (wealth effect) –The Interest Rate Effect –The Open Economy Effect

8. Slide 10-8 The Aggregate Demand Curve The Real-Balance Effect –The change in the real value of money balances when the price level changes

9. Slide 10-9 The Aggregate Demand Curve The Interest Rate Effect –Higher price levels indirectly increase the interest rate.

10. Slide 10-10 The Aggregate Demand Curve The Open Economy Effect –Higher price levels result in foreigners’ desiring to buy fewer American-made goods while Americans desire more foreign-made goods (i.e., net exports fall).

11. Slide 10-11 Aggregate Demand versus Demand for a Single Good When the aggregate demand curve is derived, we are looking at the entire circular flow of income and product. When a demand curve is derived, we are looking at a single product in one market only.

12. Slide 10-12 Shifts in the Aggregate Demand Curve Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right. Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.

13. Slide 10-13 Shifts in the Aggregate Demand Curve Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right. Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.

14. Slide 10-14 Factors Increasing Aggregate Demand A drop in the foreign exchange value of the dollar Increased security about jobs and future income Improvements in economic conditions in other countries A reduction in real interest rates (nominal interest rates corrected for inflation) not due to price level changes Tax decreases An increase in the amount of money in circulation

15. Slide 10-15 Shifts in the Aggregate Demand Curve Real GDP per Year ($ trillions) GDP Deflator 340 120 12675 90 AD

16. Slide 10-16 Shifts in the Aggregate Demand Curve Real GDP per Year ($ trillions) GDP Deflator 340 120 12675 90 AD

17. Slide 10-17 Shifts in the Aggregate Demand Curve Real GDP per Year ($ trillions) GDP Deflator 340 120 12675 90 AD 1 AD Increase in aggregate demand

18. Slide 10-18 Factors Decreasing Aggregate Demand A rise in the foreign exchange value of the dollar Decreased security about jobs and future income Declines in economic conditions in other countries A rise in real interest rates (nominal interest rates corrected for inflation) not due to price level changes Tax increases A decrease in the amount of money in circulation

19. Slide 10-19 Shifts in the Aggregate Demand Curve Real GDP per Year ($ trillions) GDP Deflator 340 120 12675 90 AD

20. Slide 10-20 Shifts in the Aggregate Demand Curve Real GDP per Year ($ trillions) GDP Deflator 340 120 12675 90 AD

21. Slide 10-21 Shifts in the Aggregate Demand Curve Real GDP per Year ($ trillions) GDP Deflator 340 120 12675 90 AD Decrease in aggregate demand AD 1

22. Slide 10-22 The Aggregate Supply Curve The Long-Run Aggregate Supply Curve –Real output at full employment –A vertical line representing real output based on full information and after full adjustment has occurred

23. Slide 10-23 Long-Run Equilibrium and the Price Level Figure 10-5

24. Slide 10-24 Long-Run Equilibrium and the Price Level Long-run equilibrium occurs at the intersection of the LRAS curve and the AD curve –Equilibrium price level is determined –Planned real expenditures for the economy are equal to total planned production along the economy’s trends growth path

25. Slide 10-25 The Effects of Economic Growth on the Price Level Figure 10-6, Panel (a)

26. Slide 10-26 The Effects of Economic Growth on the Price Level Figure 10-6, Panel (b)

27. Slide 10-27 The Effects of Economic Growth on the Price Level Secular Deflation –An increase in LRAS will, ceteris paribus, result in a decrease in the price level. Avoiding Secular Deflation –If the AD curve shifts outward by the same amount as the LRAS curve, the price level remains constant. –The AD curve can be shifted outward by increasing the money supply.

28. Slide 10-28 Inflation Rates in the United States Figure 10-7 Source: Economic Report of the President; Economic Indicators, various issues

29. Slide 10-29 Causes of Inflation: Supply-Side Inflation Figure 10-8, Panel (a) When LRAS 1 shifts to LRAS 2, the price level rises from 120 to 140 Inflation is caused by a decrease in LRAS.

30. Slide 10-30 Causes of Inflation: Demand-Side Inflation Figure 10-8, Panel (b) An increase in AD from AD 1 to AD 2 causes the price level to rise from 120 to 140. An increase in AD causes inflation.

31. Slide 10-31 Causes of Inflation: Economic Growth and Inflation Figure 10-9 Source: Economic Report of the President; Economic Indicators, various issues