1. 11 Aggregate Demand and Aggregate Supply C H A P T E R Click To Go
To Appendix

2. Graphically… AGGREGATE DEMAND Defined: Aggregate Demand Curve
Amounts of Real Output
Buyers Collectively Desire
At Each Possible Price Level
Aggregate Demand Curve
Down Sloping Due To:
Real-Balances Effect
Interest-Rate Effect
Foreign Purchases Effect
Graphically…

3. AGGREGATE DEMAND CURVE
Price level AD
Real domestic output, GDP

4. CHANGES IN AGGREGATE DEMAND
Can Increase
Price level
AD2
AD1
Real domestic output, GDP

5. CHANGES IN AGGREGATE DEMAND
Can Increase
…or Decrease
Price level
AD1
AD3
Real domestic output, GDP

6. Change in Consumer Spending
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
Consumer Wealth
Consumer Expectations
Household Indebtedness
Taxes
Change in Investment Spending
Real Interest Rates
Expected Returns
Expected Future Business Conditions
Technology
Degree of Excess Capacity
Business Taxes

7. Government Spending Net Export Spending National Income Abroad
DETERMINANTS OF AGGREGATE DEMAND
Government Spending
Net Export Spending
National Income Abroad
Exchange Rates

8. AGGREGATE SUPPLY Defined: Levels of Real Domestic Output
At Each Possible Price Level
Long-run Supply Curve
Wages and Resource Prices Match Price Level
Short-run Supply Curve
Wages and Resource Prices Do Not Match Price Level

9. AGGREGATE SUPPLY Long Run P ASLR Q Price level Long-run Aggregate
Full-Employment Qf Q
Real domestic output, GDP

10. AGGREGATE SUPPLY Short Run P AS Q Aggregate Supply Short-run
Price level
Full-
Employment Q Qf
Real domestic output, GDP

11. AGGREGATE SUPPLY Changes in Aggregate Supply P Q Decrease In Aggregate
Price level
Increase In
Aggregate
Supply Q
Real domestic output, GDP

12. Domestic Resource Prices Labor Land Capital Prices of Imported Goods
DETERMINANTS OF AGGREGATE SUPPLY
Input Prices
Domestic Resource Prices
Labor
Land
Capital
Prices of Imported Goods
Market Power

13. Legal-Institutional Environment
DETERMINANTS OF AGGREGATE SUPPLY
Productivity
Productivity =
Total Output
Total Inputs
Legal-Institutional Environment
Business Taxes and Subsidies
Government Regulation

14. EQUILIBRIUM AND CHANGES IN EQUILIBRIUMP AS
Price Level
Equilibrium
Real Output
100 a b 92 AD Q
502
510
514
Real Domestic Output, GDP

15. DEMAND-PULL INFLATION
INCREASES IN AD:
DEMAND-PULL INFLATION P
AD1
AD2 AS P2
Price Level P1 Q Qf Q1 Q2
Real Domestic Output, GDP

16. DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENTb a P1
Price Level c Q Q1 Qf
Real Domestic Output, GDP

17. DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT
Wage Contracts
Morale, Effort, and Productivity
Efficiency Wages
Minimum Wage
Menu Costs
Fear of Price Wars

18. DECREASES IN AS: COST-PUSH INFLATIONb
Price Level a P1
AD1 Q Q1 Qf
Real Domestic Output, GDP

19. INCREASES IN AS: FULL EMPLOYMENT
…With Price-Level Stability P
AS1
AS2 P3 b P2 P1
Price Level a
AD2
AD1 Q Q1 Q2 Q3
Real Domestic Output, GDP

20. KEY TERMS aggregate demand-aggregate supply (AD-AS) model
real-balances effect
interest-rate effect
foreign purchases effect
determinants of aggregate demand
aggregate supply
long-run aggregate supply curve
short-run aggregate supply curve
determinants of aggregate supply
productivity
equilibrium price level
equilibrium real output
efficiency wages
menu costs
BACK
END
Copyright McGraw-Hill/Irwin, 2005

21. CHAPTER 11 - Appendix Derivation of the Aggregate Demand Curve
RELATIONSHIP OF THE AGGREGATE
DEMAND CURVE TO THE AGGREGATE
EXPENDITURES MODEL
Derivation of the
Aggregate Demand Curve
from the
Aggregate Expenditures Model
Illustrated…

22. Aggregate expenditures
DERIVATION OF THE AGGREGATE DEMAND CURVE
AE1 at P 1 1
AE2 at P 2
AE3 at P 3
Aggregate expenditures
(billions of dollars) 2 3 Q3 Q2 Q1 3’ P3
The Aggregate Demand
Can Be Constructed
Price level 2’ P2 1’ P1 AD
Click To Return
To Presentation Q3 Q2 Q1
Real Domestic Output

23. Increase in Aggregate Expenditures Increase in Aggregate Demand
SHIFTS IN THE AGGREGATE EXPENDITURES
SCHEDULE & THE AGGREGATE DEMAND CURVE
AE2 at P 1
AE1 at P 1
Aggregate expenditures
(billions of dollars)
Increase in
Aggregate
Expenditures Q1 Q2
Increase in
Aggregate
Demand
Price level P1
AD2
Click To Return
To Presentation
AD1 Q1 Q2
Real Domestic Output

24. Any Questions? Increase in Aggregate Expenditures Increase in
SHIFTS IN THE AGGREGATE EXPENDITURES
SCHEDULE & THE AGGREGATE DEMAND CURVE
Any
Questions?
AE2 at P 1
AE1 at P 1
Aggregate expenditures
(billions of dollars)
Increase in
Aggregate
Expenditures Q1 Q2
Increase in
Aggregate
Demand
Price level P1
AD2
Click To Return
To Presentation
AD1 Q1 Q2
Real Domestic Output

25. Coming next...
FISCAL
POLICY
Chapter 12