ad as model

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Aggregate Demand andAggregate Supply

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc !ll rights reser"e#



Aggregate Demand

• Real GDP desired at each price level• Inverse relationship

• Real balances effect

• Interest effect

• Foreign purchases effect

LO1 29-2



Aggregate Demand

Real domestic output, GDP

P r i c e

l e v e l

AD

LO1

0

29-3



Changes in Aggregate Demand

• Determinants of aggregate demand• hift factors affecting !" I" G" #n

• 2 components involved

• !hange in one of the determinants

• $ultiplier effect

LO1 29-%



Changes in Aggregate Demand


P r i c e

l e v e l

AD1

AD3

AD2

LO1

0

29-&



Consumer Spending

• !onsumer 'ealth• (ousehold borro'ing

• !onsumer e)pectations

• Personal ta)es

LO1 29-*



Investment Spending

• Real interest rates• +)pected returns

• +)pectations about future business

conditions

• ,echnolog

• Degree of e)cess capacit• .usiness ta)es

LO1 29-/



Government Spending

•Government spending increases

• 0ggregate demand increases 1as long

as interest rates and ta) rates do not

change

• $ore transportation proects

• Government spending decreases

• 0ggregate demand decreases• 4ess militar spending

LO1 29-5



Net Export Spending

• 6ational income abroad• +)change rates

• Dollar depreciation

• Dollar appreciation

LO1 29-9



Aggregate Supply

• ,otal real output produced at each price level

• Relationship depends on time hori7on

• Immediate short run 1e)istence of

unutili7ed capacit in the econom

• hort run 1trade off bet'een inflation and

economic gro'th

• 4ong run 1resources full emploed given

technolog

LO2 29-8



AS: Immediate Short Run


P r i c e

l e v

e l

ASISR

Qf

Immediate-sort-ru!

a""re"ate suppl#

P1

0

LO2 29-88



Aggregate Supply: Short Run


P r i c e

l e v e

l

0Qf

AS

A""re"ate suppl#

$sort ru!%

LO2 29-82



Aggregate Supply: Long Run


P r i c e

l e v e

l

ASLR

Qf 0

Lo!"-ru!

a""re"ate

suppl#

LO2 29-83



Changes in Aggregate Supply

• Determinants of aggregate suppl• hift factors : availabilit;suppl of

the four factors of production"

productivit levels brought aboutthrough technological changes and

institutional factors

• !hanges raise or lo'er per-unitproduction costs

LO2 29-8%



Changes in Aggregate Supply


P r i c e

l e v e

l

AS 1

AS 3

AS 2

0

LO2 29-8&



ncreases: eman uIn"ation


P r i c e

l e v e l

AD1

AS

P 1

P 2

Q 2

Q 1

Q f

AD2

0

LO& 29-8*



Decreases in AD: Recession


P r i c e

l e v e l

AD1

AS

P 1

P 2

Q 1 Q

2 Q

f

AD2

c

ab

0

LO& 29-8/



Decreases in AD: Recession

• Prices are do'n'ardl infle)ible• Fear of price 'ars

• $enu costs

• <age contracts

• +fficienc 'ages

• $inimum 'age la'

LO& 29-85

ecreases n : ost us



ecreases n : ost usIn"ation


P r i c e

l e v e

l

AD

AS1

P 1

P 2

Q 1 Q

f

AS2

a

b

0

LO& 29-89



Increases in AS: #ullEmployment


P r i c e

l e v e l

AD1

AS2

P 1

P 2

Q 2 Q

1

AS1

b

AD2

c

P 3

Q 3

a

0

LO& 29 2

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