Aggregate Supply / Demand

[object Object],[object Object],[object Object],[object Object],AGGREGATE DEMAND ,[object Object],[object Object],[object Object],[object Object],[object Object],Graphically…

Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 2 Aggregate Demand Can Increase

Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 3 Aggregate Demand Can Increase … or Decrease

DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending ,[object Object],[object Object],[object Object],[object Object],Change in Investment Spending ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending ,[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object],[object Object],AGGREGATE SUPPLY Defined: The amounts of real output that firms will produce at each possible price level

3 Reasons For Downward Sloping AD Curve Real Money-balances E ffect – economy’s monetary wealth. If we buy a fixed bundle of goods & services (food/clothing/shelter), at lower prices, it now takes less money. Our accumulated savings balances [401k, CDs, bonds] will purchase more. AD Interest Rate Effect – lower interest rates increase investment and consumption. Foreign Purchase Effect – with lower U.S. prices, both Americans and foreigners buy more American goods. Market Basket PL 1 PL 2

AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Horizontal Range Upsloping or Intermediate Range Vertical Range

AGGREGATE SUPPLY Price level Real domestic output, GDP Q P AS 3 AS 1 AS 2 Increase In Aggregate Supply Decrease In Aggregate Supply Changes in Aggregate Supply

DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

DETERMINANTS OF AGGREGATE SUPPLY Change in Productivity Change in Legal-Institutional Environment ,[object Object],[object Object],Productivity = Real Output Input

AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Long Run AS LR Long-run Aggregate Supply Q f Full-Employment

AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Short Run AS Aggregate Supply Short-run Q f Full- Employment

Price Level Real Domestic Output, GDP Q P AS AD 510 502 514 EQUILIBRIUM AND CHANGES IN EQUILIBRIUM 92 100 a b Equilibrium Real Output

Price Level Real Domestic Output, GDP Q P AS AD 1 INCREASES IN AD: DEMAND-PULL INFLATION P 2 P 1 AD 2 Q f Q 1 Q 2

Price Level Real Domestic Output, GDP Q P AS AD 1 DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT P 1 AD 2 Q f Q 1 a c b

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Why prices are downwardly inflexible

Price Level Real Domestic Output, GDP Q P AS 1 AD 1 DECREASES IN AS: COST-PUSH INFLATION P 2 Q f Q 1 a b AS 2 P 1

Price Level Real Domestic Output, GDP Q P AS 1 AD 1 INCREASES IN AS: FULL EMPLOYMENT P 1 Q 2 Q 1 a b AS 2 P 2 … With Price-Level Stability AD 2 P 3 Q 3 Any Questions?

Coming soon... FISCAL POLICY Chapter 12

Aggregate Supply / Demand

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Aggregate Supply / Demand