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11 - 1 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Aggregate Demand and Aggregate Supply 11 C H A P T E R

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11 - 2 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Defined: The amounts of real output that buyers collectively desire to purchase at each possible price level AGGREGATE DEMAND Aggregate Demand Curve Down Sloping Due To: Real-Balances Effect Interest-Rate Effect Foreign Purchases Effect

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11 - 3 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Aggregate expenditures (billions of dollars) 0 0 Price level GDP 1 P1P1 AE 1 at P 1 1 1’ P2P2 AE 2 at P 2 2 2’ AE 3 at P 3 3 P3P3 3’ The Aggregate Demand Can Be Constructed DERIVATION OF THE AGGREGATE DEMAND CURVE GDP 3 GDP 2 GDP 1 GDP 3 GDP 2 AD

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11 - 4 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 2 Aggregate Demand Can Increase

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11 - 5 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 3 Aggregate Demand Can Increase …or Decrease

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11 - 6 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer Wealth Consumer Expectations Consumer Indebtedness Taxes Change in Investment Spending Real Interest Rates Expected Returns Expected Future Business Conditions Technology Degree of Excess Capacity Business Taxes

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11 - 7 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending National Income Abroad Exchange Rates Changes in Aggregate Demand Shifts and the Aggregate Expenditures Model Illustrated…

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11 - 8 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Aggregate expenditures (billions of dollars) 0 0 Price level GDP 2 AE 2 at P 2 P1P1 AE 1 at P 1 SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE GDP 1 GDP 2 GDP 1 AD 1 AD 2 Increase in Aggregate Expenditures Increase in Aggregate Demand

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11 - 9 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show 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 AGGREGATE SUPPLY Defined: The amounts of real output that firms will produce at each possible price level

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11 - 10 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Horizontal Range Upsloping or Intermediate Range Vertical Range

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11 - 11 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show 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

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11 - 12 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic Resource Availability Land Labor Capital Entrepreneurial Ability Prices of Imported Goods Market Power

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11 - 13 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE SUPPLY Change in Productivity Productivity = Real Output Input Change in Legal-Institutional Environment Business Taxes and Subsidies Government Regulation

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11 - 14 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS AD Equilibrium in the Intermediate Range QeQe Q1Q1 Q2Q2 EQUILIBRIUM: REAL OUTPUT AND THE PRICE LEVEL P1P1 PePe

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11 - 15 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS AD Equilibrium in the Horizontal Range QeQe Q1Q1 Q2Q2 EQUILIBRIUM: REAL OUTPUT AND THE PRICE LEVEL PePe

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11 - 16 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS AD 2 Increasing Demand in the Horizontal Range Q1Q1 Q2Q2 CHANGES IN EQUILIBRIUM P1P1 AD 1

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11 - 17 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS AD 4 Increasing Demand in the Intermediate Range Q3Q3 Q4Q4 CHANGES IN EQUILIBRIUM P3P3 AD 3 P4P4

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11 - 18 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS AD 6 Increasing Demand in the Vertical Range QcQc CHANGES IN EQUILIBRIUM P5P5 AD 5 P6P6

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11 - 19 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP AS AD 2 Inflation and the Multiplier GDP 1 GDP 2 MULTIPLIER WITH PRICE-LEVEL CHANGES P1P1 AD 1 AD 3 GDP 3 P2P2 Full Multiplier Effect Reduced Multiplier Effect Due to Inflation

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11 - 20 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Decreasing Demand That Causes A Recession DECREASES IN AD AND RECESSION Wage Contracts Morale, Effort, and Productivity Efficiency Wages Minimum Wage Menu Costs Fear of Price Wars Recession and Cyclical Unemployment

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11 - 21 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP AS AD 1 Decreasing Demand That Causes A Recession Q2Q2 Q1Q1 DECREASES IN AD AND RECESSION P1P1 AD 2

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11 - 22 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP AS 1 AD Decreasing Supply That Causes A Recession Q2Q2 Q1Q1 DECREASES IN AD AND RECESSION P1P1 P2P2 AS 2

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11 - 23 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP AS 2 Increasing Supply: Full-Employment and Price-Level Stability Q2Q2 Q3Q3 INCREASES IN AS AND INFLATION P1P1 P3P3 AS 1 AD 1 AD 2 P2P2 Q1Q1

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11 - 24 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP AS 2 Increasing Supply: Full-Employment and Price-Level Stability Q2Q2 Q3Q3 INCREASES IN AS AND INFLATION P1P1 P3P3 AS 1 AD 1 AD 2 P2P2 Q1Q1 Chapter Conclusions

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ENDBACK aggregate demand- aggregate supply (AD- AS) model aggregate demand real-balances effect interest-rate effect foreign purchases effect determinants of aggregate demand aggregate supply horizontal range (of AS curve) intermediate range (of AS curve) vertical range (of AS curve) determinants of aggregate supply productivity equilibrium price level equilibrium real output efficiency wages menu costs Copyright McGraw-Hill/Irwin, 2002

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11 - 26 Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Coming next... FISCAL POLICY Chapter 12

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