Shifters of Aggregate Demand Shifters of Aggregate Supply AD = C + I + G + X Change in Consumer Spending Change in Investment Spending Change in Government Spending Net EXport Spending Shifters of Aggregate Supply AS = R + A + P Change in Resource Prices Change in Actions of the Government Change in Productivity Copyright ACDC Leadership 2015

Use the AD and AS model to show an economy at full employment output LRAS Price Level AS PLe AD QY GDPR 2 Copyright ACDC Leadership 2015

The economy can only be in one of three places at any time Max Capacity 0% Unemployment Real GDP Capital Goods Real GDP Consumer Goods Time Recessionary Gap Full Employment 5% Unemployment Full Employment Inflationary Gap 3 Copyright ACDC Leadership 2015

Inflationary Gap Output is high and unemployment is less than NRU LRAS Price Level AS Actual GDP above potential GDP PL1 AD1 QY Q1 GDPR 4 Copyright ACDC Leadership 2015

Recessionary Gap Output low and unemployment is more than NRU LRAS Price Level AS Actual GDP below potential GDP PL1 AD1 Q1 QY GDPR 5 Copyright ACDC Leadership 2015

Stagnate Economy + Inflation Still considered recessionary gap Example: If there is a negative “supply shock” of oil. What happens to PL and Output? LRAS Price Level AS1 AS Stagflation Stagnate Economy + Inflation PL1 PLe Still considered recessionary gap AD Q1 QY GDPR 6 Copyright ACDC Leadership 2015

What Happens In the Long-Run? 7 Copyright ACDC Leadership 2015

In the long-run, wages and costs increase If consumer spending increases, what will happen in the short-run and in the long-run? In the long-run, wages and costs increase LRAS AS1 Real GDP Price Level AS PL2 PL1 Real GDP PLe AD AD1 QY Q1 GDPR Time 8 Copyright ACDC Leadership 2015

In the long-run, wages & costs eventually decrease If consumer spending decreases, what will happen in the short-run and in the long-run? In the long-run, wages & costs eventually decrease LRAS Real GDP Price Level AS AS2 PLe PL1 Real GDP PL2 AD2 AD Q1 QY GDPR Time 9 Copyright ACDC Leadership 2015

Economic Growth 10 Copyright ACDC Leadership 2015

If investment increases, what happens in the short-run and long-run? Capital Stock- Machinery and tools purchased by businesses that increase their output Price Level LRAS LRAS1 The PPC shifts outward since producers can make more AS AS1 Capital Goods PL1 PLe AD AD1 QY Q1 QY1 GDPR Consumer Goods 11 Copyright ACDC Leadership 2015

Only Investment causes growth since firms increase their capital stock An increase in consumption or government spending doesn’t cause economic growth. Only Investment causes growth since firms increase their capital stock Price Level LRAS1 AS1 Capital Goods PLe AD1 QY1 GDPR Consumer Goods 12 Copyright ACDC Leadership 2015