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Aggregate Demand & Aggregate Supply by KeWjCeJx


									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
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

   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

       Change in productivity (total output/total input or
        per-unit production cost of total input cost/total

       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
   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

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