Chapter 22 Aggregate Demand and Supply Analysis
Copyright © 2007 Pearson Addison-Wesley. All rights reserved Aggregate Demand The relationship between the quantity of aggregate output demanded and the price level when all other variables are held constant Based on the quantity theory of money Determined solely by the quantity of money Based on the components parts Consumption, investment, government spending and net exports
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Copyright © 2007 Pearson Addison-Wesley. All rights reserved Factors that Shift Aggregate Demand An increase in the money supply shifts AD to the right because it lowers interest rates and stimulates investment spending An increase in spending from any of the components C, I, G, NX, will also shift AD to the right
Copyright © 2007 Pearson Addison-Wesley. All rights reserved Aggregate Supply Long-run aggregate supply curve Determined by amount of capital and labor and the available technology Vertical at the natural rate of output generated by the natural rate of unemployment Short-run aggregate supply curve Wages and prices are sticky Generates an upward sloping SRAS as firms attempt to take advantage of short-run profitability when price level rises
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Copyright © 2007 Pearson Addison-Wesley. All rights reserved Factors that Shift SRAS Costs of production Tightness of the labor market Expected price level Wage push Change in production costs unrelated to wages (supply shocks)
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Copyright © 2007 Pearson Addison-Wesley. All rights reserved Self-Correcting Mechanism Regardless of where output is initially, it returns eventually to the natural rate Slow Wages are inflexible, particularly downward Need for active government policy Rapid Wages and prices are flexible Less need for government intervention
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Copyright © 2007 Pearson Addison-Wesley. All rights reserved Shifts in Long-Run Aggregate Supply Economic growth Real business cycle theory Real supply shocks drive short-run fluctuations in the natural rate of output (shifts of LRAS) No need for government intervention Hysteresis Departure from full employment levels as a result of past high unemployment Natural rate of unemployment shifts upward and natural rate of output falls below full employment Expansionary policy needed to shift aggregate demand
Copyright © 2007 Pearson Addison-Wesley. All rights reserved Conclusions Shift in aggregate demand affects output only in the short run and has no effect in the long run Shifts in aggregate demand affects only price level in the long run Shift in short run aggregate supply affects output and price only in the short run and has no effect in the long run The economy has a self-correcting mechanism
Copyright © 2007 Pearson Addison-Wesley. All rights reserved
Copyright © 2007 Pearson Addison-Wesley. All rights reserved
Copyright © 2007 Pearson Addison-Wesley. All rights reserved
Copyright © 2007 Pearson Addison-Wesley. All rights reserved