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Aggregate Demand & Aggregate Supply Chapter 10 Chapter Overview AE model is a “fixed price” level model and the AD-AS model is a “variable price” level model Define AD, what causes it to be downward sloping, what are its determinants, how does it relate to AE Define AS, what are its determinants, what are its ranges What does Equilibrium AD-AS mean, what can the various positions of equilibrium mean for inflation and/or recession 10.1 Aggregate Demand (AD) Definition: a schedule which shows the quantity of real GDP consumers are willing and able to purchase given various Price Levels There is an “inverse” relationship between the above stated variables See Figure 10.1 Chapter 10 Figure 10.1 10.1 Aggregate Demand (AD) Why is AD downward sloping? Not for the same reasons as D is downward sloping (income and substitution effects) AD downward sloping because: (3 reasons) Real-Balances Effect >PL < purchasing power of accumulated assets, therefore consumers feel poorer, and less willing to spend (1990’s stock market boom) Interest-Rate Effect (assumes a fixed money supply) >PL > money demanded by consumers and businesses; thus interest rates > & inv. and consumption < 10.1 Aggregate Demand (AD) AD downward sloping because: (continued) Foreign Purchases Effect When US PL> relative to foreign PL, then foreigners buy fewer US goods, and we buy more foreign goods How does the AD model differ from AE? See Figure 10.2 Notice difference in variable titles 10.1 Aggregate Demand (AD) Determinants of AD (what causes it to shift) Change in Consumer Spending (consumer wealth, expectations, indebtedness, taxes) Change in Investment Spending (interest rates, expected returns based on expectations, technology, excess capacity, taxes) Change in Government Spending (increase or decrease in government purchases and/or services) Change in Net Export Spending (national income abroad, and exchange rates) Chapter 10 Figure 10.2 10.2 Aggregate Supply (AS) Definition: a curve which demonstrates the quantity of production (real GDP) producers are willing and able to provide the market, given various PL. AS in an upward sloping curve There are 3 distinctive ranges of AS (short, long and intermediate ranges) or (Classical, Keynesian, intermediate ranges) See Figure 10.5 10.2 Aggregate Supply (AS) Determinants of AS: (causes for it to shift) Change in input prices (domestic availability of factors, prices of imported resources, market power) Change in productivity (total output/total input or per-unit production cost of total input cost/total output) Change in legal-institutional environment (taxes and subsidies, regulations) Chapter 10 Figure 10.3 Chapter 10 Figure 10.4 Chapter 10 Figure 10.5 10.3 Equilibrium & Changes in Equilibrium See Figures 10.6 & 10.7 > AD and depending where it relates to AS there may be Demand-Pull Inflation Influences of the Multiplier with PL changes < AD may constitute a recession & cyclical unemployment (Figure 10.8) Chapter 10 Figure 10.6 Chapter 10 Figure 10.7 Chapter 10 Figure 10.8 10.3 Equilibrium: Real Output & the Price Level and 10.4 Changes in Equil. < AS may cause Cost-Push Inflation See Figure 10.9 > AS may bring Full Employment and Price-Level Stability See Figure 10.10 Chapter 10 Figure 10.9 Chapter 10 Figure 10.10 Chapter 10 Appendix Derivation of the Aggregate Demand and Aggregate Supply models Relationship of AD/AS model to the Aggregate Expenditures model See Figure 1 in Chapter 10 appendix See Figure 2 in Chapter 10 appendix Appendix Chapter 10 Figure 1(a) Appendix Chapter 10 Figure 1(b) Appendix Chapter 10 Figure 2(a) Appendix Chapter 10 Figure 2(b) Chapter Summary Definitions of AD and AS What are the determinants of AD? What are the determinants of AS? What does Cost-push inflation look like? What does Demand-pull inflation look like? How does the multiplier effect work? How does AD/AS model relate to the AE model?
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