2. 11 - 1 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Aggregate Demand and Aggregate Supply 11 C H A P T E R Click To Go To Appendix

3. 11 - 2 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Defined: Amounts of Real Output Buyers Collectively Desire At Each Possible Price Level AGGREGATE DEMAND Aggregate Demand Curve Down Sloping Due To: Real-Balances Effect Interest-Rate Effect Foreign Purchases Effect Graphically…

4. 11 - 3 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show AGGREGATE DEMAND CURVE Price level Real domestic output, GDP AD

5. 11 - 4 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 2 Aggregate Demand Can Increase

6. 11 - 5 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 3 …or Decrease Aggregate Demand Can Increase

7. 11 - 6 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show 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

8. 11 - 7 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending National Income Abroad Exchange Rates

9. 11 - 8 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show 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

10. 11 - 9 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Long Run AS LR Long-run Aggregate Supply QfQf Full-Employment

11. 11 - 10 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Short Run AS Aggregate Supply Short-run QfQf Full- Employment

12. 11 - 11 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show AGGREGATE SUPPLY Price level Real domestic output, GDP Q P AS 3 AS 1 AS 2 Increase In Aggregate Supply Decrease In Aggregate Supply Changes in Aggregate Supply

13. 11 - 12 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE SUPPLY Input Prices Domestic Resource Prices Labor Land Capital Prices of Imported Goods Market Power

14. 11 - 13 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE SUPPLY Productivity = Total Output Total Inputs Legal-Institutional Environment Business Taxes and Subsidies Government Regulation

15. 11 - 14 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS AD 510502514 EQUILIBRIUM AND CHANGES IN EQUILIBRIUM 92 100 ab Equilibrium Real Output

16. 11 - 15 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS AD 1 INCREASES IN AD: DEMAND-PULL INFLATION P2P2 P1P1 AD 2 QfQf Q1Q1 Q2Q2

17. 11 - 16 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS AD 1 DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT P1P1 AD 2 QfQf Q1Q1 a c b

18. 11 - 17 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Wage Contracts Morale, Effort, and Productivity Efficiency Wages Minimum Wage Menu Costs Fear of Price Wars DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT

19. 11 - 18 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS 1 AD 1 DECREASES IN AS: COST-PUSH INFLATION P2P2 QfQf Q1Q1 a b AS 2 P1P1

20. 11 - 19 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Price Level Real Domestic Output, GDP Q P AS 1 AD 1 INCREASES IN AS: FULL EMPLOYMENT P1P1 Q2Q2 Q1Q1 a b AS 2 P2P2 …With Price-Level Stability AD 2 P3P3 Q3Q3

21. ENDBACK aggregate demand- aggregate supply (AD- AS) model aggregate demand 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 Copyright McGraw-Hill/Irwin, 2005

22. 11 - 21 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show RELATIONSHIP OF THE AGGREGATE DEMAND CURVE TO THE AGGREGATE EXPENDITURES MODEL Derivation of the Aggregate Demand Curve from the Aggregate Expenditures Model Illustrated… CHAPTER 11 - Appendix

23. 11 - 22 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Aggregate expenditures (billions of dollars) 0 0 Price level Q1Q1 P1P1 AE 1 at P 1 1 1’ P2P2 AE 2 at P 2 2 2’ AE 3 at P 3 3 P3P3 3’ The Aggregate Demand Can Be Constructed DERIVATION OF THE AGGREGATE DEMAND CURVE Q3Q3 Q2Q2 Q1Q1 Q3Q3 Q2Q2 AD Click To Return To Presentation Real Domestic Output

24. 11 - 23 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Aggregate expenditures (billions of dollars) 0 0 Price level Q2Q2 AE 2 at P 1 P1P1 AE 1 at P 1 SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE Q1Q1 Q2Q2 Q1Q1 AD 1 AD 2 Increase in Aggregate Expenditures Increase in Aggregate Demand Click To Return To Presentation Real Domestic Output

25. 11 - 24 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Aggregate expenditures (billions of dollars) 0 0 Price level Q2Q2 AE 2 at P 1 P1P1 AE 1 at P 1 SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE Q1Q1 Q2Q2 Q1Q1 AD 1 AD 2 Increase in Aggregate Expenditures Increase in Aggregate Demand Click To Return To Presentation Real Domestic Output Any Questions?

26. 11 - 25 Copyright McGraw-Hill/Irwin, 2005 Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms Previous Slide Next Slide End Show Coming next... FISCAL POLICY Chapter 12