Lecture Macroeconomics - Chapter 9: Aggregate demand and aggregate supply

Aggregate Demand
and
Aggregate Supply
Chapter 9
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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In this chapter you will learn
Why the aggregate demand curve is
downward sloping, and what factors
shift the entire curve
What determines the shape of the short
run aggregate supply curve, and what
factors shift the entire curve
How the equilibrium price level and real
GDP are determined
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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In this chapter you will learn
The distinction between the short-run
and long-run supply curve
The nature and causes of recessionary
and inflationary gaps

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Chapter 9 Topics
Aggregate Demand
Aggregate Supply: The Short Run
Equilibrium: Real Output & the Price
Level
Short-Run & Long-Run Aggregate
Supply
Equilibrium vs Full-Employment GDP

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Aggregate Demand (AD):
The amounts of real output that
buyers collectively desire to
purchase at each possible price level

AD = C + Ig + G + Xn
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Aggregate Demand (AD)

Aggregate Quantity Demanded (Real
GDP) and the Price Level are inversely
related as follows:
Price Level

Figure 9 - 1

AD

Real GDP
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Aggregate Demand (AD)
...is downsloping because of the
following effects of a change in price
level:
1 - Real-balances Effect
2 - Interest-rate Effect
3 - Foreign Trade Effect
Remember: these effects are
caused by price level changes
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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CHANGES IN AGGREGATE DEMAND
Figure 9 - 2

Price level

AD Can Increase

AD1
0

Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

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CHANGES IN AGGREGATE DEMAND
Figure 9 - 2

Price level

AD Can Increase
shift RIGHT

AD2
AD1
0

Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

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CHANGES IN AGGREGATE DEMAND
Figure 9 - 2

Price level

AD Can Decrease

AD1
0

Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

10


CHANGES IN AGGREGATE DEMAND
Figure 9 - 2

Price level

AD Can Decrease

shift LEFT

AD3

AD1

0

Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

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Determinants of Aggregate Demand
Consumer Spending
Consumer wealth
Consumer expectations
Household indebtedness
Taxes

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Determinants of Aggregate Demand
Investment Spending
Real Interest Rates
Expected Returns
Expectations about future business
conditions
Technology
Degree of excess capacity
Business taxes
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Determinants of Aggregate Demand
Government Spending
Net Export Spending
National Income Abroad
Exchange Rates

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Chapter 9 Topics
Aggregate Demand
Aggregate Supply: The Short Run
Equilibrium: Real Output & the Price
Level
Short-Run & Long-Run Aggregate
Supply
Equilibrium vs Full-Employment GDP

© 2002 McGraw-Hill Ryerson Ltd.

15

Macroeconomics, Chapter 9

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Aggregate Supply (Short Run):
The level of real domestic output
that will be produced at each
price level, given fixed input prices

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Aggregate Supply (Short Run)
...has three ranges:
1 - Horizontal Range
2 - Vertical Range
3 - Intermediate (Upsloping) Range

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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AGGREGATE SUPPLY CURVE (AS)
Figure 9 - 5

Price level

PL

Upsloping or

Intermediate
Range

Vertical
Range

Horizontal
Range

Qf

Q

Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

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Changes in Aggregate Supply
Figure 9 - 6

PL

AS can
decrease

Price level

AS1

Q
Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

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Changes in Aggregate Supply
Figure 9 - 6

PL

AS2 AS1

AS can
decrease

Price level

shift LEFT

Q
Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

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Changes in Aggregate Supply
Figure 9 - 6

PL

AS can
increase

Price level

AS1

Q
Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

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Changes in Aggregate Supply
Figure 9 - 6

PL

AS can
increase
shift RIGHT

Price level

AS1 AS3

Q
Real domestic output, GDP
© 2002 McGraw-Hill Ryerson Ltd.

Macroeconomics, Chapter 9

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Determinants of Aggregate Supply
Input Prices
Domestic Resource Availability
Land
Labour
Capital
Entrepreneurial ability

Prices of Imported Resources
Market Power
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Determinants of Aggregate Supply
Productivity
productivity = total output/total inputs

Legal-Institutional Environment
Business Taxes & Subsidies
Government Regulation

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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Chapter 9 Topics
Aggregate Demand
Aggregate Supply: The Short Run
Equilibrium: Real Output & the Price
Level
Short-Run & Long-Run Aggregate

Supply
Equilibrium vs Full-Employment GDP

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 9

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