1. Aggregate Supply & Demand Model
Macroeconomic Analysis

2. AS/AD Model Purpose
Allows complex analysis of macroeconomic events & the effects on:
Unemployment, Inflation and GDP growth
Sample analysis from AS/AD model
What will happen in the Government lowers taxes
What will happen in the Federal Reserve ↑ interest rates

3. GDP adjusted for inflation
Aggregate Demand
Aggregate-demand curve (AD)- the demand curve for the entire economy of U.S. made goods
demand from households, firms, exports & government
4 Components of AD : AD = C + I + G + NX
Inflation = Price Level
AD = C + I + G + (X-M)
GDP adjusted for inflation

4. Shifts in AD Curve
Shifts arise from changes in any of the 4 Determinants of AD
Consumption
Investment
Government Purchases
Net Exports
AD = C + I + G + (X-M)

5. Aggregate Supply Curve
Aggregate-supply curve (AS)- the entire supply curve of all goods & services produced in U.S.
quantity of goods & services all firms produce
Price
Level
You use the AS/AD model to predict the impact of Gov’t policy or other economic events
AS1 P1 Y1 E1
AD = C + I + G + NX
AD1
Real
GDP

6. AS/AD Model Worksheet
See what you understand

7. Using AS/AD Model How can you improve the current economy?
Price
Level
Real
GDP
AD1
AD2
Gov’t ↓ Taxes => consumer income ↑
C ↑ => AD ↑ => R-GDP ↑ P2 Y2 E2 P1 Y1 E1
AD = C + I + G + NX

8. Using AS/AD Model AS1 --------------- AD1 Price Level Real GDP E2 P1Y1 E1