Alomar_111_151 Chapter 11: Aggregate Demand (AD) and Aggregate Supply (AS)

Alomar_111_152 What is demand? AD: a curve that shows the amount of outputs that buyers want to purchase at each possible price. negative The relationship between quantity demanded and the price level is negative: an increase in aggregate price level reduces quantity demanded.

Alomar_111_153 all The AD deals with all goods and services that are produced in the economy in a given year. AD = C + I + G + Xn GDP demand This is a GDP demand

Alomar_111_154 The AD Curve P AD Q=GDP

Alomar_111_155 Changes in Price Level: move along Leads to move along the AD curve: An increase in (P) leads to a decrease in Q d A decrease in (P) leads to an increase in Q d only factor This is the only factor that leads to a move along the AD curve.

Alomar_111_156 Determinants of AD: shift Any change in these factors leads to a shift in the AD upward or downward. Recall that AD = C + I + G + Xn Therefore, any change in these components will leads to a change in AD

Alomar_111_ Consumer Spending (C): A. Consumer wealth B. Consumer expectations C. Debt D. Taxes

Alomar_111_ Investment Spending (I): 2. Investment Spending (I): A. Real interest rate B. Expected return C. Expectations D. Technology E. Inventories

Alomar_111_159 Government Spending (G): 3. Government Spending (G): Net Exports (Xn) 4. Net Exports (Xn)

Alomar_111_1510 The AD Curve P AD Q=GDP

Alomar_111_1511 Aggregate Supply (AS) What is supply? a schedule or curve that shows the amount of outputs that firms willing to produce at each possible price. positive The relationship between quantity supplied and the price level is positive: an increase in aggregate price level increases quantity supplied

Alomar_111_1512 all The AS shows all goods and services that are produced in the economy in a given year. GDP supply This is a GDP supply

Alomar_111_1513 AS Curve P AS Q=GDP

Alomar_111_1514 Changes in Price Level move Leads to move along the AS curve: An increase in (P) leads to an increase in Q s A decrease in (P) leads to a decrease in Q s This is the only factor that leads to a move along the As curve.

Alomar_111_1515 Determinants of AS 1. Input prices 2. Taxes and subsidies 3. Technology 4. Government regulations

Alomar_111_1516 The Equilibrium P ADAS Q=GDP

Alomar_111_1517 AS in the short and Long Run Short-run: when at least one production factor is constant (cannot be changed) Long-run: when all production factors are variable (can be changed) This will give up two different AS curves

Alomar_111_1518 In the (SR), since some factors are constant, we cannot reach our full production capacity, the AS curve is positively slopped. In the (LR), since all factors are variable, we assume that we reached our full production capacity, the AS curve is vertical.

Alomar_111_1519 AS Curve P LRAS SRAS F E Q=GDP

Alomar_111_1520 The Equilibrium: AS = AD P AD AD F E Q=GDP