PART 4: THE MACROECONOMY

Ch 7: Aggregate Demand and

Aggregate Supply
Price Rice Indonesia
($) Economy

Quantity
 Indonesia
Economy Who demands a nation output?
P
L

PL
1

PL
2
AD

Y1 Y2 rGD
P
 Aggregate Demand
Why AD curve is downward sloping:

PL

A
PL
1

B
PL
2 AD

Y1 Y2 rGD
P
 Aggregate Demand
Shifts in the AD curve:

PL

AD

rGD
P
Read pg 97-103
Answer the following questions:
1. What are the components of AD?
2. What shift the AD?
3. Why does short-run AS curve slope downwards?
4. What shift short-run AS curve?
Aggregate Supply
Definition:
Short-run Aggregate Supply
Movements along the SRAS curve:

PL
SRAS

PL
2

PL
1

Y1 Y2 rGD
P
Classical vs Keynesian LR Aggregate Supply
 Macroeconomic Equilibrium
Price AS Aggregate Equilibrium:
level

AD

rGDP
Exercise 7.1
Identify the effects of the following on aggregate demand, aggregate
supply, output and the price level:
1. A reduction in the rate of interest
2. An increase in government spending on health care
3. Advances in information technology
4. Net emigration
5. A cut in income tax
6. An increase in wealth
 Exercise 7.2
On the diagram:
Price LRAS
level 1. Draw a new AD curves to the right of AD
and label AD1.
2. Draw AD2 to the right of AD1.
3. Draw AD3 to the left of AD.
PL
4. For each of the shifts in AD, state what
A has happened to output, employment and
D
Y rGDP price level.
Exercise 7.3
Using Keynesian LRAS diagram, draw the following situations, indicate any
changes in price level and aggregate output:
1. An increase in consumer spending where there is considerable spare
capacity.
2. An increase in export when the economy is beginning to experience
shortages of resources.
3. An increase in investment when an economy is operating at full capacity.
4. An advancement in technology which improves the efficiency of capital
when an economy is initially producing at or close to full capacity.
5. Land reclamation when an economy has considerable spare capacity.