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Aggregate Demand and Supply
Aggregate Demand and Supply
• Aggregate Demand
• Aggregate Supply
• Shifts in Aggregate Demand and Aggregate
Supply
• Causes of Inflation
• Supply-Side Economics
• How the Government Can Influence (but
probably not control) the Economy
The Aggregate-Demand Curve
• Curve that shows the quantity of goods and
services that households, firms, the
government, and customers abroad want to
buy at each price level.
Aggregate Demand Curve
Price
Level
P1
P2
1. A
decrease in
the price Aggregate
level… Demand
0
Y1 Y2 Quantity of
Output
2….increases the quantity of goods and
services demanded
Why the Aggregate-Demand Curve
Slopes Downward
1. The Wealth Effect:
(The Price Level and Consumption)
2. The Interest-Rate Effect:
(The Price Level and Investment)
3. The Exchange-Rate Effect:
(The Price Level and Net Export)
Why Aggregate-Demand Curve Might Shift
P1
AD2
Aggregate
Demand
0
Y1 Y2 Quantity of
Output
2….increases the quantity of goods and
services demanded
Shifts in the Aggregate Demand Curve
to the Left
Price
Level
P1
AD1
AD2
0
Y2 Y1 Quantity of
Output
2…Decreases the quantity of goods and
services demanded
The Aggregate-Supply Curve
• A Curve that shows the quantity of goods and
services that firms choose to produce and sell
at each price level.
P1
P2
1. A
decrease in
the price
level…
0
Y2 Y1 Quantity of
Output
2….Reduces the quantity of goods and
services supplies in the short run.
The Aggregate-Supply Curve in the
Long Run
Price
Level Long -Run
aggregate
supply
P1
P2
0
Natural Level Quantity of
of Out put Output
Why the Long-Run Aggregate-Supply
Curve Might Shift
• Shifts Arising from Changes in Labor
• Shifts Arising from Changes in Capital
• Shifts Arising from Changes in Natural
Resources
• Shifts Arising from Changes in Technological
Knowledge
Using Aggregate Demand and Aggregate Supply
to Depict Long-Run Growth and Inflation
2….and growth in the Long-Run
money supply shifts Aggregate
aggregate demand… Supply,
4….and P2010
ongoing
inflation P2010 Aggregate
P2010
Demand, AD2010
AD2000
AD1990
0 Y1990 Y2000 Y2010
Quantity of
Output
3….leading to growth
in output
Why the Aggregate-Supply Curve Slopes
Upward in the Short Run
• Macro economists have proposed three
theories for the upward slope of the short-run
aggregate-supply curve.
1. The Sticky-Wage Theory
2. The Sticky-Price Theory
3. The Misperceptions Theory
Why the Short-Run Aggregate-Supply
Curve Might Shift
• Shifts Arising from Changes in Labor:
• Shifts Arising from Changes in Capital:
• Shifts Arising from Changes in Natural
Resources:
• Shifts Arising from Changes in Technology :
• Shifts Arising from Changes in the Expected
Price Level:
The Long-Run Equilibrium
Equilibrium A
Price
Aggregate
Demand
0
Natural Level
Quantity
of Out put
of Output
Four Steps for Analyzing Macroeconomic Fluctuations
P2 B Aggregate
demand…
C Aggregate
P3
Demand,
AD1
AD2
0 Y2 Y1
Quantity of
4…. and output returns Output
to its natural level
The Effects of a Shift in Aggregate
Supply
Short run 1, an adverse shift
aggregate in the short-run
Price Long -Run Supply, aggregate-supply
Level aggregate AS2 curve…
supply AS1
B
3…. And P2 A
the price
level to rise, P1
Aggregate
Demand,
0 Y2 Y1
Quantity of
Output
2….causes output to fall…
Stagflation 1.When short-run
aggregate supply
falls…
AS2
Price Long -Run Short run
aggregate
Level aggregate
Supply,
supply AS1
P3 C 2….policymakers can
accommodate the shift by
P2 A expanding aggregate
demand…
3….Which causes P1
the price level to
rise further…
AD2
AD1 Aggregate
Demand,
0
Natural Level Quantity of
of Out put Output
4…. But keeps output at
its natural level,