Aggregate Demand and

Aggregate Supply

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Aggregate Demand

Real GDP desired at each price level

Inverse relationship
Real balances effect
Interest effect
Foreign purchases effect

LO1

29-2

Price level

Aggregate Demand

AD
0
LO1

Real domestic output, GDP

29-3

Changes in Aggregate Demand

Determinants of aggregate demand

Shift factors affecting C, I, G, Xn
2 components involved
Change in one of the determinants
Multiplier effect

LO1

29-4

Price level

Changes in Aggregate Demand

AD2

AD3

AD1

Real domestic output, GDP

LO1

29-5

Consumer Spending

Consumer wealth
Household borrowing
Consumer expectations
Personal taxes

LO1

29-6

Investment Spending

Real interest rates

Expected returns
Expectations about future business
conditions
Technology
Degree of excess capacity
Business taxes
LO1

29-7

Government Spending

Government spending increases

Aggregate demand increases (as long

LO1

as interest rates and tax rates do not

change)
More transportation projects
Government spending decreases
Aggregate demand decreases
Less military spending

29-8

Net Export Spending

National income abroad

Exchange rates
Dollar depreciation
Dollar appreciation

LO1

29-9

Aggregate Supply

Total real output produced at each price level

Relationship depends on time horizon
Immediate short run (existence of
unutilized capacity in the economy)
Short run (trade off between inflation and
economic growth)
Long run (resources fully employed given
technology)

LO2

29-10

AS: Immediate Short Run

Price level

Immediate-short-run
aggregate supply
P1

ASISR

Qf

Real domestic output, GDP

LO2

29-11

Aggregate Supply: Short Run

AS

Price level

Aggregate supply
(short run)

Qf

Real domestic output, GDP

LO2

29-12

Aggregate Supply: Long Run

Price level

ASLR

Long-run
aggregate
supply

Qf

Real domestic output, GDP

LO2

29-13

Changes in Aggregate Supply

Determinants of aggregate supply

Shift factors availability/supply of

LO2

the four factors of production,

productivity levels brought about
through technological changes and
institutional factors
Changes raise or lower per-unit
production costs
29-14

Changes in Aggregate Supply

AS3

AS1

Price level

AS2

Real domestic output, GDP

LO2

29-15

AD Increases: Demand-Pull
Inflation

Price level

AS

P2
P1

AD2
AD1
0

Qf

Q1 Q2

Real domestic output, GDP

LO4

29-16

Decreases in AD: Recession

Price level

AS

P1
P2

a
c

AD1
AD2
0

Q1 Q2 Q f
Real domestic output, GDP

LO4

29-17

Decreases in AD: Recession

Prices are downwardly inflexible

Fear of price wars
Menu costs
Wage contracts
Efficiency wages
Minimum wage law

LO4

29-18

Decreases in AS: Cost-Push

Inflation

Price level

AS2

P2
P1

AS1

b
a

AD
0

Q1 Qf
Real domestic output, GDP

LO4

29-19

Increases in AS: Full-Employment

Price level

AS1

P3
P2
P1

AS2

b
a

AD2
AD1
0

Q1

Q 2 Q3

Real domestic output, GDP

LO4

29-20