Aggregate demandAggregate supply

Equilibrium

Chapter 22: Aggregate Supply and AggregateDemand

ECO 301: Money and Banking

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

EquilibriumGoals

Goals 1/ 20

Specific Goals

Be able to explain GDP fluctuations when the price level isalso flexible.Explain how real GDP and the price level are related in theshort run.

Learning Objectives

LO2: Understand the role money plays in the interaction withmarkets for other assets.LO5: Analyze macroeconomic problems and prescribeappropriate monetary policy solutions.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

EquilibriumGoals

Goals 1/ 20

Specific Goals

Be able to explain GDP fluctuations when the price level isalso flexible.Explain how real GDP and the price level are related in theshort run.

Learning Objectives

LO2: Understand the role money plays in the interaction withmarkets for other assets.LO5: Analyze macroeconomic problems and prescribeappropriate monetary policy solutions.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Aggregate Demand 2/ 20

Aggregate demand: schedule or curve that shows thequantities of real GDP that buyers collectively desire topurchase at each price level.

Aggregate demand is downward sloping - but not for the samereason the demand curve for a single product is downwardsloping.

Recall demand curves for single goods slope downwardbecause of the substitution effect and the income effect.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Aggregate Demand 2/ 20

Aggregate demand: schedule or curve that shows thequantities of real GDP that buyers collectively desire topurchase at each price level.

Aggregate demand is downward sloping - but not for the samereason the demand curve for a single product is downwardsloping.

Recall demand curves for single goods slope downwardbecause of the substitution effect and the income effect.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Aggregate Demand 2/ 20

Aggregate demand: schedule or curve that shows thequantities of real GDP that buyers collectively desire topurchase at each price level.

Aggregate demand is downward sloping - but not for the samereason the demand curve for a single product is downwardsloping.

Recall demand curves for single goods slope downwardbecause of the substitution effect and the income effect.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Aggregate Demand 3/ 20

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Downward sloping AD 4/ 20

Real balances effect: when the price level increases, thepurchasing power of the consumers’ accumulated savingsbalances decreases.

With a lower real savings balance, consumers decreaseconsumption.

Foreign purchases effect: When the price level rises relativeto the price level in foreign countries, the foreign demand forU.S. products decreases. Similarly, the demand for importsincreases.

This causes exports to fall and imports to rise.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Downward sloping AD 4/ 20

Real balances effect: when the price level increases, thepurchasing power of the consumers’ accumulated savingsbalances decreases.

With a lower real savings balance, consumers decreaseconsumption.

Foreign purchases effect: When the price level rises relativeto the price level in foreign countries, the foreign demand forU.S. products decreases. Similarly, the demand for importsincreases.

This causes exports to fall and imports to rise.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Downward sloping AD 4/ 20

Real balances effect: when the price level increases, thepurchasing power of the consumers’ accumulated savingsbalances decreases.

With a lower real savings balance, consumers decreaseconsumption.

Foreign purchases effect: When the price level rises relativeto the price level in foreign countries, the foreign demand forU.S. products decreases. Similarly, the demand for importsincreases.

This causes exports to fall and imports to rise.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Downward sloping AD 4/ 20

Real balances effect: when the price level increases, thepurchasing power of the consumers’ accumulated savingsbalances decreases.

With a lower real savings balance, consumers decreaseconsumption.

Foreign purchases effect: When the price level rises relativeto the price level in foreign countries, the foreign demand forU.S. products decreases. Similarly, the demand for importsincreases.

This causes exports to fall and imports to rise.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 5/ 20

When something the price level affects the AD, this causesthe AD curve to shift.

The following affect consumption and therefore shift AD.Consumer wealth: financial assets such as savings accounts,stocks, and bonds, and physical assets that consumers canborrow against like houses and land.

When consumer wealth increases, aggregate demandincreases, causing it to shift to the right.

Household indebtedness: if household debt increases, AD shiftsto the left.Taxes: Increase in taxes decreases consumption, AD shifts tothe left.Consumer expectations: expectations about future income orfuture taxes can shift AD.Real interest rate: an increase in the real interest ratedecreases consumption which shifts AD to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 5/ 20

When something the price level affects the AD, this causesthe AD curve to shift.

The following affect consumption and therefore shift AD.Consumer wealth: financial assets such as savings accounts,stocks, and bonds, and physical assets that consumers canborrow against like houses and land.

When consumer wealth increases, aggregate demandincreases, causing it to shift to the right.

Household indebtedness: if household debt increases, AD shiftsto the left.Taxes: Increase in taxes decreases consumption, AD shifts tothe left.Consumer expectations: expectations about future income orfuture taxes can shift AD.Real interest rate: an increase in the real interest ratedecreases consumption which shifts AD to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 5/ 20

When something the price level affects the AD, this causesthe AD curve to shift.

The following affect consumption and therefore shift AD.Consumer wealth: financial assets such as savings accounts,stocks, and bonds, and physical assets that consumers canborrow against like houses and land.

When consumer wealth increases, aggregate demandincreases, causing it to shift to the right.

Household indebtedness: if household debt increases, AD shiftsto the left.Taxes: Increase in taxes decreases consumption, AD shifts tothe left.Consumer expectations: expectations about future income orfuture taxes can shift AD.Real interest rate: an increase in the real interest ratedecreases consumption which shifts AD to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 5/ 20

When something the price level affects the AD, this causesthe AD curve to shift.

The following affect consumption and therefore shift AD.Consumer wealth: financial assets such as savings accounts,stocks, and bonds, and physical assets that consumers canborrow against like houses and land.

When consumer wealth increases, aggregate demandincreases, causing it to shift to the right.

Household indebtedness: if household debt increases, AD shiftsto the left.Taxes: Increase in taxes decreases consumption, AD shifts tothe left.Consumer expectations: expectations about future income orfuture taxes can shift AD.Real interest rate: an increase in the real interest ratedecreases consumption which shifts AD to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 5/ 20

When something the price level affects the AD, this causesthe AD curve to shift.

The following affect consumption and therefore shift AD.Consumer wealth: financial assets such as savings accounts,stocks, and bonds, and physical assets that consumers canborrow against like houses and land.

When consumer wealth increases, aggregate demandincreases, causing it to shift to the right.

Household indebtedness: if household debt increases, AD shiftsto the left.Taxes: Increase in taxes decreases consumption, AD shifts tothe left.Consumer expectations: expectations about future income orfuture taxes can shift AD.Real interest rate: an increase in the real interest ratedecreases consumption which shifts AD to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 5/ 20

When something the price level affects the AD, this causesthe AD curve to shift.

The following affect consumption and therefore shift AD.Consumer wealth: financial assets such as savings accounts,stocks, and bonds, and physical assets that consumers canborrow against like houses and land.

When consumer wealth increases, aggregate demandincreases, causing it to shift to the right.

Household indebtedness: if household debt increases, AD shiftsto the left.Taxes: Increase in taxes decreases consumption, AD shifts tothe left.Consumer expectations: expectations about future income orfuture taxes can shift AD.Real interest rate: an increase in the real interest ratedecreases consumption which shifts AD to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 5/ 20

When something the price level affects the AD, this causesthe AD curve to shift.

The following affect consumption and therefore shift AD.Consumer wealth: financial assets such as savings accounts,stocks, and bonds, and physical assets that consumers canborrow against like houses and land.

When consumer wealth increases, aggregate demandincreases, causing it to shift to the right.

Household indebtedness: if household debt increases, AD shiftsto the left.Taxes: Increase in taxes decreases consumption, AD shifts tothe left.Consumer expectations: expectations about future income orfuture taxes can shift AD.Real interest rate: an increase in the real interest ratedecreases consumption which shifts AD to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 5/ 20

When something the price level affects the AD, this causesthe AD curve to shift.

The following affect consumption and therefore shift AD.Consumer wealth: financial assets such as savings accounts,stocks, and bonds, and physical assets that consumers canborrow against like houses and land.

When consumer wealth increases, aggregate demandincreases, causing it to shift to the right.

Household indebtedness: if household debt increases, AD shiftsto the left.Taxes: Increase in taxes decreases consumption, AD shifts tothe left.Consumer expectations: expectations about future income orfuture taxes can shift AD.Real interest rate: an increase in the real interest ratedecreases consumption which shifts AD to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 6/ 20

The following affect investment and therefore shift AD.

Real interest rate: increases the cost of investment, thereforeshifts AD to the left.Expectations: expectations about the return on an investmentshift investment demand and therefore shift AD.

Change in government purchases.

The following affect exports or imports and therefore shiftAD.

Foreign incomes: higher foreign incomes increase exports,shifts AD to the right.Exchange rates: when the value of U.S. currency depreciates,this causes imports to and exports to .

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 6/ 20

The following affect investment and therefore shift AD.

Real interest rate: increases the cost of investment, thereforeshifts AD to the left.Expectations: expectations about the return on an investmentshift investment demand and therefore shift AD.

Change in government purchases.

The following affect exports or imports and therefore shiftAD.

Foreign incomes: higher foreign incomes increase exports,shifts AD to the right.Exchange rates: when the value of U.S. currency depreciates,this causes imports to and exports to .

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 6/ 20

The following affect investment and therefore shift AD.

Real interest rate: increases the cost of investment, thereforeshifts AD to the left.Expectations: expectations about the return on an investmentshift investment demand and therefore shift AD.

Change in government purchases.

The following affect exports or imports and therefore shiftAD.

Foreign incomes: higher foreign incomes increase exports,shifts AD to the right.Exchange rates: when the value of U.S. currency depreciates,this causes imports to and exports to .

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 6/ 20

The following affect investment and therefore shift AD.

Real interest rate: increases the cost of investment, thereforeshifts AD to the left.Expectations: expectations about the return on an investmentshift investment demand and therefore shift AD.

Change in government purchases.

The following affect exports or imports and therefore shiftAD.

Foreign incomes: higher foreign incomes increase exports,shifts AD to the right.Exchange rates: when the value of U.S. currency depreciates,this causes imports to and exports to .

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 6/ 20

The following affect investment and therefore shift AD.

Real interest rate: increases the cost of investment, thereforeshifts AD to the left.Expectations: expectations about the return on an investmentshift investment demand and therefore shift AD.

Change in government purchases.

The following affect exports or imports and therefore shiftAD.

Foreign incomes: higher foreign incomes increase exports,shifts AD to the right.Exchange rates: when the value of U.S. currency depreciates,this causes imports to and exports to .

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 6/ 20

The following affect investment and therefore shift AD.

Real interest rate: increases the cost of investment, thereforeshifts AD to the left.Expectations: expectations about the return on an investmentshift investment demand and therefore shift AD.

Change in government purchases.

The following affect exports or imports and therefore shiftAD.

Foreign incomes: higher foreign incomes increase exports,shifts AD to the right.Exchange rates: when the value of U.S. currency depreciates,this causes imports to and exports to .

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Downward slopingDeterminants of AD

Determinants of AD 6/ 20

The following affect investment and therefore shift AD.

Real interest rate: increases the cost of investment, thereforeshifts AD to the left.Expectations: expectations about the return on an investmentshift investment demand and therefore shift AD.

Change in government purchases.

The following affect exports or imports and therefore shiftAD.

Foreign incomes: higher foreign incomes increase exports,shifts AD to the right.Exchange rates: when the value of U.S. currency depreciates,this causes imports to and exports to .

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Long run aggregate supply 7/ 20

Long run aggregate supply:in the long run the economyuses all factors of productionefficiently, therefore long runaggregate supply is a verticalline at potential GDP

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Short run aggregate supply 8/ 20

In the short run, factor markets are slow to adjust. Wages areslow to adjust and there may unemployment or even excessemployment.

Therefore in the short run, the aggregate supply curve isupward sloping.

Increases in the price level without increasing wages createlarger profits for firms, creates incentive to produce more.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Short run aggregate supply 8/ 20

In the short run, factor markets are slow to adjust. Wages areslow to adjust and there may unemployment or even excessemployment.

Therefore in the short run, the aggregate supply curve isupward sloping.

Increases in the price level without increasing wages createlarger profits for firms, creates incentive to produce more.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Short run aggregate supply 8/ 20

In the short run, factor markets are slow to adjust. Wages areslow to adjust and there may unemployment or even excessemployment.

Therefore in the short run, the aggregate supply curve isupward sloping.

Increases in the price level without increasing wages createlarger profits for firms, creates incentive to produce more.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Short run aggregate supply 9/ 20

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Determinants of AS 10/ 20

When something besides the price level affects AS, this shiftsAS.

Prices of factors of production: when the price of labor,capital, or land increase, this shifts AS to the left.

Exchange rate: if the value of the U.S. currency decreases, thisincreases the cost of importing foreign factors of production.

Technology: an increase in technology shifts AS to the right.

Business taxes can affect output decisions of firms and shiftAS.

Other government regulation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Determinants of AS 10/ 20

When something besides the price level affects AS, this shiftsAS.

Prices of factors of production: when the price of labor,capital, or land increase, this shifts AS to the left.

Exchange rate: if the value of the U.S. currency decreases, thisincreases the cost of importing foreign factors of production.

Technology: an increase in technology shifts AS to the right.

Business taxes can affect output decisions of firms and shiftAS.

Other government regulation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Determinants of AS 10/ 20

When something besides the price level affects AS, this shiftsAS.

Prices of factors of production: when the price of labor,capital, or land increase, this shifts AS to the left.

Exchange rate: if the value of the U.S. currency decreases, thisincreases the cost of importing foreign factors of production.

Technology: an increase in technology shifts AS to the right.

Business taxes can affect output decisions of firms and shiftAS.

Other government regulation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Determinants of AS 10/ 20

When something besides the price level affects AS, this shiftsAS.

Prices of factors of production: when the price of labor,capital, or land increase, this shifts AS to the left.

Exchange rate: if the value of the U.S. currency decreases, thisincreases the cost of importing foreign factors of production.

Technology: an increase in technology shifts AS to the right.

Business taxes can affect output decisions of firms and shiftAS.

Other government regulation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Determinants of AS 10/ 20

When something besides the price level affects AS, this shiftsAS.

Prices of factors of production: when the price of labor,capital, or land increase, this shifts AS to the left.

Exchange rate: if the value of the U.S. currency decreases, thisincreases the cost of importing foreign factors of production.

Technology: an increase in technology shifts AS to the right.

Business taxes can affect output decisions of firms and shiftAS.

Other government regulation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

Long run ASShort run ASDeterminants of AS

Determinants of AS 10/ 20

When something besides the price level affects AS, this shiftsAS.

Prices of factors of production: when the price of labor,capital, or land increase, this shifts AS to the left.

Exchange rate: if the value of the U.S. currency decreases, thisincreases the cost of importing foreign factors of production.

Technology: an increase in technology shifts AS to the right.

Business taxes can affect output decisions of firms and shiftAS.

Other government regulation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Equilibrium 11/ 20

In equilibrium, real GDP and the price level are determined by theintersection of AS and AD

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Inflation 12/ 20

Inflation can come from two sources, excess demand orincreases in production costs.

Demand pull inflation: when increases in demand causeinflation.

Cost push inflation: when increases in production cost causeinflation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Inflation 12/ 20

Inflation can come from two sources, excess demand orincreases in production costs.

Demand pull inflation: when increases in demand causeinflation.

Cost push inflation: when increases in production cost causeinflation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Inflation 12/ 20

Inflation can come from two sources, excess demand orincreases in production costs.

Demand pull inflation: when increases in demand causeinflation.

Cost push inflation: when increases in production cost causeinflation.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Demand pull inflation 13/ 20

Demand pull inflationbegins when AD increases.

Causes real GDP toincrease and the price levelto rise.

Recall: inflationary gap:when aggregateexpenditures is equal toreal GDP above potentialGDP.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Demand pull inflation 13/ 20

Demand pull inflationbegins when AD increases.

Causes real GDP toincrease and the price levelto rise.

Recall: inflationary gap:when aggregateexpenditures is equal toreal GDP above potentialGDP.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Demand pull inflation 13/ 20

Demand pull inflationbegins when AD increases.

Causes real GDP toincrease and the price levelto rise.

Recall: inflationary gap:when aggregateexpenditures is equal toreal GDP above potentialGDP.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Cost push inflation 14/ 20

Cost-push inflation beginswhen an increase inproduction cost shiftsSRAS to the left.

Causes real GDP to falland price level to rise.

Stagflation: when thereis unemployment and highinflation at the same time.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Cost push inflation 14/ 20

Cost-push inflation beginswhen an increase inproduction cost shiftsSRAS to the left.

Causes real GDP to falland price level to rise.

Stagflation: when thereis unemployment and highinflation at the same time.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Cost push inflation 14/ 20

Cost-push inflation beginswhen an increase inproduction cost shiftsSRAS to the left.

Causes real GDP to falland price level to rise.

Stagflation: when thereis unemployment and highinflation at the same time.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Long-run equilibrium 15/ 20

Recall why the short run aggregate supply curve is upwardsloping.

Suppose AD shifts to the right.

Firms will be able to sell more goods. Firms hire more laborand produce more goods.

Firm’s per-unit labor costs do not increase because wages arefixed in the short run.

In the long run, there is an excess demand for labor, wageswill increase.

This shifts the SRAS curve to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Long-run equilibrium 15/ 20

Recall why the short run aggregate supply curve is upwardsloping.

Suppose AD shifts to the right.

Firms will be able to sell more goods. Firms hire more laborand produce more goods.

Firm’s per-unit labor costs do not increase because wages arefixed in the short run.

In the long run, there is an excess demand for labor, wageswill increase.

This shifts the SRAS curve to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Long-run equilibrium 15/ 20

Recall why the short run aggregate supply curve is upwardsloping.

Suppose AD shifts to the right.

Firms will be able to sell more goods. Firms hire more laborand produce more goods.

Firm’s per-unit labor costs do not increase because wages arefixed in the short run.

In the long run, there is an excess demand for labor, wageswill increase.

This shifts the SRAS curve to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Long-run equilibrium 15/ 20

Recall why the short run aggregate supply curve is upwardsloping.

Suppose AD shifts to the right.

Firms will be able to sell more goods. Firms hire more laborand produce more goods.

Firm’s per-unit labor costs do not increase because wages arefixed in the short run.

In the long run, there is an excess demand for labor, wageswill increase.

This shifts the SRAS curve to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Long-run equilibrium 15/ 20

Recall why the short run aggregate supply curve is upwardsloping.

Suppose AD shifts to the right.

Firms will be able to sell more goods. Firms hire more laborand produce more goods.

Firm’s per-unit labor costs do not increase because wages arefixed in the short run.

In the long run, there is an excess demand for labor, wageswill increase.

This shifts the SRAS curve to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Long-run equilibrium 15/ 20

Recall why the short run aggregate supply curve is upwardsloping.

Suppose AD shifts to the right.

Firms will be able to sell more goods. Firms hire more laborand produce more goods.

Firm’s per-unit labor costs do not increase because wages arefixed in the short run.

In the long run, there is an excess demand for labor, wageswill increase.

This shifts the SRAS curve to the left.

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

Long-run equilibrium 16/ 20

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

AE and AS/AD 17/ 20

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

AE and AS/AD 18/ 20

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

AE and AS/AD 19/ 20

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand

Aggregate demandAggregate supply

Equilibrium

InflationLong-run equilibrium

AE and AS/AD 20/ 20

ECO 301: Money and Banking Chapter 22: Aggregate Supply and Aggregate Demand