THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 651

CHAPTER 24

Aggregate Demand and Supply Analysis

LE A RNI NG OB JE CTI VE S
After studying this chapter you should be able to
1. discern between monetarist and Keynesian views of aggregate demand
2. interpret the aggregate demand and supply framework for the determination
of aggregate output and the price level
3. differentiate between short-run and long-run equilibria in the context of the
aggregate demand and supply framework

PRE VI EW

In earlier chapters we focused considerable attention on monetary policy because
it touches our everyday lives by affecting the prices of the goods we buy and
the quantity of available jobs. In this chapter we develop a basic tool, aggregate
demand and supply analysis, which will enable us to study the effects of monetary policy on output and prices. Aggregate demand is the total quantity of an
economy s final goods and services demanded at different price levels. Aggregate
supply is the total quantity of final goods and services that firms in the economy
want to sell at different price levels. As with other supply and demand analyses,
the actual quantity of output and the price level are determined by equating aggregate demand and aggregate supply.
Aggregate demand and supply analysis will enable us to explore how aggregate output and the price level are determined. (The Financial News box,
Aggregate Output, Unemployment, and the Price Level, indicates where and how
often data on aggregate output and the price level are published.) Not only will
the analysis help us interpret recent episodes in the business cycle, but it will
also enable us to understand the debates on how economic policy should be
conducted.

AG GRE G ATE D EM AN D
The first building block of aggregate supply and demand analysis is the aggregate

demand curve, which describes the relationship between the quantity of aggregate
output demanded and the price level when all other variables are held constant.
Aggregate demand is made up of four component parts: consumer expenditure, the total demand for consumer goods and services; planned investment
spending,1 the total planned spending by business firms on new machines, facto1

Recall that economists restrict use of the word investment to the purchase of new physical capital,
such as a new machine or a new house, which adds to expenditure.

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