1. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 24 Aggregate Demand and Aggregate Supply

2. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Aggregate Demand Curve Aggregate Demand Overall Price Level(in Billions) 0.95 $1,700 1.00 1,500 1.05 1,300 Real GDP (in Billions) $1,300 $1,500 $1,700 Price Index 1.05 1.00.95 AD

3. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Why the Aggregate Demand Curve Slopes Downward Price Index Real GDP 1. The Wealth or Real Balances Effect 2. The Substitute-of-Foreign-Goods Effect 3. The Constant Nominal Income Effect

4. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. A Shift in the Aggregate Demand Curve Price Index Real GDP (in Billions) $1,500 $2,000 1.0 AA'A' AD AD'

5. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. A Schematic Overview of the Movements in Aggregate Demand U.S. Monetary Policy Foreign Policy and Developments U.S. Fiscal Policy Exchange Rates Capital Flow Money Supply Interest Rates Government Spending and Taxes Aggregate Demand and Income Interest Rates, Stock Prices, Exchange Rates, Expected Inflation, Economic Outlook ConsumptionInvestmentNet ExportsGovernment

6. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Short-Run Aggregate Supply Aggregate Supply Overall Price Level(in Billions) 0.95 $1,300 1.00 1,500 1.05 1,300 Real GDP (in Billions) $1,300 $1,500 $1,700 Price Index 1.05 1.00.95 AD AD' A'' SRAS A B C

7. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Determinants of the Natural Level of Real Output Institutional arrangements of the labor market and other input market Capital StockNatural resources Labor forceTechnological know-how Natural Level of Real Output

8. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Long-Run Aggregate Real Supply Price Index Real GDP 1.10 1.00 LRAS B A AD' AD

9. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Shifts in Short-Run Aggregate Supply Price Index $1,500 $1,700 Real GDP 1.10 1.05 1.00 LRAS B A AD' AD C D SRAS'' SRAS' SRAS