1. Lesson 4
. AGGREGATE DEMAND AND AGGREGATE SUPPLY
Aggregate demand: Meaning; shape and position;
effect of policy variables; determinants.
Aggregate supply: Meaning; shape and position in
short and long run; effect of policy variables;
determinants

2. • Defined: The amounts of real output
that buyers collectively desire to
purchase at each possible price level
• Aggregate Demand Curve
• Down Sloping Due To:
• Real-Balances Effect
• Interest-Rate Effect
• Foreign Purchases Effect

3. The Aggregate Demand
Curve
GDP
Pricelevel
AD1

4. DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending ©
• Consumer Wealth
• Consumer Expectations
• Consumer Indebtedness
• Taxes
• Real Interest Rates
• Expected Returns
• Expected Future Business
Conditions
• Technology
• Degree of Excess Capacity
• Business Taxes
Change in Investment Spending (I)

5. Government Spending (G)
Net Export Spending (X-M)
• National Income Abroad
• Exchange Rates

6. AGGREGATE SUPPLY
Defined: The amounts of real
output that firms will produce
at each possible price level
Higher Price Levels Provide An
Incentive to Produce More
Aggregate Supply Has Three
Segments or Ranges:
1 - Horizontal Range
2 - Intermediate (Upsloping) Range
3 - Vertical Range

7. AGGREGATE SUPPLY CURVE
Upsloping or
Intermediate
Range
Vertical
Range
Horizontal
Range
Real domestic output, GDP
Pricelevel
AS
Q
P

8. DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
Domestic Resource
Availability
• Land
• Labor
• Capital
• Entrepreneurial Ability
Prices of Imported Goods
Market Power

9. Change in Productivity
Productivity =
Real Output
Input
Change in Legal-Institutional
Environment
• Business Taxes and
Subsidies
• Government Regulation