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Aggregate Demand and Aggregate Supply

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January 12, 2011. Aggregate Demand and Aggregate Supply. Aggregate Demand. Amount of real GDP purchased at each price level Why the downward slope? Real-balances effect Interest-rate effect Foreign purchases effect Consumption, investment, and net exports. Aggregate Demand Curve. - PowerPoint PPT Presentation

Text of Aggregate Demand and Aggregate Supply

Chapter 10

Aggregate Demand andAggregateSupply January 12, 2011

2Aggregate DemandAmount of real GDP purchased at each price levelWhy the downward slope?Real-balances effectInterest-rate effectForeign purchases effectConsumption, investment, and net exports

3Aggregate Demand CurveReal Domestic Output, GDPPrice LevelADAggregateDemand

4Aggregate DemandDeterminants of aggregate demandFixed variables along the demand curve Change in fixed variable Multiplier effectConsumer spending variables:Consumer wealthConsumer expectationsHousehold borrowingPersonal taxes

5Aggregate DemandInvestment spending variables Real interest ratesExpected returnsFuture business conditionsTechnologyDegree of excess capacityBusiness taxes

6Aggregate DemandGovernment spendingNet export spending variablesNational income abroadExchange rates

7Changes in Aggregate DemandReal Domestic Output, GDPPrice LevelAD1Increase inAggregateDemandAD3AD2Decrease in AggregateDemand

8Amount real GDP produced at each price levelThree time horizonsImmediate short runFew days to a few monthsAll prices fixedImplicit price agreements Contractual agreementsAggregate Supply

9Aggregate SupplyReal Domestic Output, GDPPrice LevelASISRImmediate-short-run Aggregate SupplyQf

10Short runInput prices fixedOutput prices variableReal profit changesLong runAll prices variableFull employment GDPAll prices adjustAggregate Supply

11Real Domestic Output, GDPPrice Level0QfAggregate Supply(Short Run)Slope not constant: per unit production cost and firm capacityAggregate Supply

12Aggregate SupplyReal Domestic Output, GDPPrice LevelASLRLong-runAggregate SupplyQf

13Determinants of aggregate supplyChange in input priceDomestic resource pricesPrices of imported resourcesChange in productivityChange in legal-institutional environmentBusiness taxes and subsidiesGovernment regulationAggregate Supply

14Real Domestic Output, GDPPrice LevelAS1Increase inAggregateSupplyAS3AS2Decrease inAggregateSupplyAggregate Supply

15EquilibriumReal OutputDemanded(Billions)Price Level(Index Number)Real OutputSupplied(Billions)$5065085105125141081041009692$513512510507502Equilibrium Price Level andEquilibrium Real GDP

16Real Domestic Output, GDP(Billions of Dollars)Price Level10092502510514abADASEquilibriumEquilibrium

17Changes in EquilibriumReal Domestic Output, GDPPrice LevelADASP1P2Q2Q1QfAD1Increase in Aggregate DemandDemand-PullInflation

18Changes in EquilibriumReal Domestic Output, GDPPrice LevelAD1ASP1P2Q1Q2QfAD2Decrease in Aggregate DemandCreates aRecessionacb

181819Decrease in aggregate demandRecession and cyclical unemploymentDeflation?Downward price inflexibility:Fear of price warsMenu costsWage contractsMorale, effort, and productivityEfficiency wagesMinimum WageChanges in Equilibrium

20Real Domestic Output, GDPPrice LevelADAS1P1P2Q1QfDecrease in Aggregate SupplyCost-PushInflationAS2abChanges in Equilibrium

21Real Domestic Output, GDPPrice LevelAD1AS2P1P2Q2Q1Increases in Aggregate Supply Full-Employment With Price-Level StabilityAS1bAD2cP3Q3aChanges in Equilibrium

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