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Aggregate Demand And Aggregate Supply

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Aggregate Demand And Aggregate Supply The Aggregate Demand Curve (AD) The aggregate demand curve is downward sloping, specifying an inverse relationship between the ... – PowerPoint PPT presentation

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Title: Aggregate Demand And Aggregate Supply


1
Aggregate Demand And Aggregate Supply
2
The Aggregate Demand Curve (AD)
  • The aggregate demand curve is downward sloping,
    specifying an inverse relationship between the
    price level and the quantity demanded of Real
    GDP, ceteris paribus.

3
The Aggregate Demand Curve (continued)
  • Real GDP
  • the value of the entire output produced
    annually within a countrys borders, adjusted for
    price changes.

4
The Aggregate Demand Curve (continued)
Year Price of good X Quantity produced of good X (units) GDP Real GDP
1 (base year) 10 100 10 x 100 1000 10 x 100 1000
2 12 120 12 x 120 1440 10 x 120 1200
3 14 140 14 x 140 1960 10 x 140 1400
5
The Aggregate Demand Curve (continued)
Aggregate Demand
Price Index Quantity demanded of goods and services (quantity demanded of real GDP)
100 1200
110 1000
120 800
6
Why Does The Aggregate Demand Curve Slope
Downward?
  • Explained by the real balance effect, the
    interest rate effect, and the international trade
    effect.

7
Real Balance Effect (Due To A Change In The Price
Level)Monetary Wealth (Money Holdings)
  • Example
  • A person who has 50000 in cash.
  • Suppose the price level falls.
  • Causes the purchasing power of the persons
  • 50000 rises.
  • Becomes wealthier, buys more goods.
  • Exhibit 2 Real Balance In Effect Page 155.

8
Interest Rate Effect (Due To A Change In The
Price Level)
  • Consider of a person who buy a fixed bundle of
  • goods each week. Suppose the price level falls,
  • increasing the purchasing power of the persons
  • money. With more purchasing power, the
  • person can purchase fixed bundle with less
  • money. The person will save money more,
  • causes the supply of credit increases, which is
  • the interest rate drops. Households and
    businesses
  • borrow more, buying more goods, Real GDP rises.
  • Exhibit 2 Page 155 Interest Rate Effect

9
International Trade Effect
  • The change in foreign sector spending as the
    price level changes.
  • Exhibit 2 Page 155 International Trade
    Effect.

10
A Change In The Quantity Demanded Of Real GDP
Versus A Change In Aggregate Demand
  • A change in the quantity demanded of real GDP is
    brought about by a change in the price level.
  • Exhibit 3 Page 156 figure a.

11
A Change In The Quantity Demanded Of Real GDP
Versus A Change In Aggregate Demand (continued)
  • A change in aggregate demand is represented as a
    shift in the aggregate demand curve.
  • Exhibit 3 Page 156 figure b.

12
Changes In Aggregate Demand Shifts In The AD
Curve
  • Aggregate demand changes when the spending on
    goods and services changes.
  • If spending increases at a given price level,
    aggregate demand increases.
  • If spending decreases at a given price level,
    aggregate demand decreases.

13
How Spending Components Affect Aggregate Demand?
  • Let
  • C 100
  • I 100
  • G 100
  • EX 50
  • IM 15
  • 335 is spent on goods and services
  • Total expenditure on goods and services C I
    G NX
  • C increases, I increases, G increases, NX
    increases Total expenditure increases
  • C decreases, I decreases, G decreases, NX
    decreases Total expenditure decreases

14
Factors That Can Change C, I, G, NX And Therefore
Can Change AD
  • Consumption,
  • 4 factors that can affect consumption, such
    as
  • 1. Wealth
  • wealth increases..consumption
  • increases.AD increases
  • wealth decreases..consumption
  • decreases.AD decreases

15
Factors That Can Change C, I, G, NX And Therefore
Can Change AD (continued)
  • Consumption,
  • 4 factors that can affect consumption, such
    as
  • 2. Expectations about future prices and
    income
  • Expect higher future prices.consumption
  • increases..AD increases
  • Expect lower future prices.consumption
  • decreases..AD decreases
  • Expect higher future income.consumption
  • increases..AD increases
  • Expect lower future income.consumption
    decreases.AD
  • decreases

16
Factors That Can Change C, I, G, NX And Therefore
Can Change AD (continued)
  • Consumption,
  • 4 factors that can affect consumption, such
    as
  • 3. Interest rate
  • Interest rate increases..consumption
  • decreases.AD decreases
  • Interest rate decreases.consumption
  • increases.AD increases

17
Factors That Can Change C, I, G, NX And Therefore
Can Change AD (continued)
  • Consumption,
  • 4 factors that can affect consumption, such
    as
  • 4. Income taxes
  • Income taxes increases..consumption
  • decreases.AD decreases
  • Income taxes decreasesconsumption
  • increases..AD increases

18
Factors That Can Change C, I, G, NX And Therefore
Can Change AD (continued)
  • Investment
  • 3 factors that can affect investment, such
    as
  • 1. Interest rate
  • Interest rate increases..investment
  • decreases.AD decreases
  • Interest rate decreasesinvestment
  • increases..AD increases

19
Factors That Can Change C, I, G, NX And Therefore
Can Change AD (continued)
  • Investment
  • 3 factors that can affect investment, such
    as
  • 2. Expectations about future sales
  • Businesses become optimistic about
  • future sales.Investment
  • increases..AD increases
  • Businesses become pessimistic about
  • future sales.Investment
  • decreases..AD decreases

20
Factors That Can Change C, I, G, NX And Therefore
Can Change AD (continued)
  • Investment
  • 3 factors that can affect investment, such
    as
  • 3. Business taxes
  • Business taxes increases.Investment
  • decreases..AD decreases
  • Business taxes decreases.Investment
  • increases.AD increases

21
Factors That Can Change C, I, G, NX And Therefore
Can Change AD (continued)
  • Net export
  • 2 factors that can affect investment, such
    as
  • 1. Foreign real national income
  • Foreign real national income
  • increasesExports increases.Net export
  • increases..AD increases
  • Foreign real national income
  • decreasesExports decreases.Net export
  • decreases..AD decreases

22
Factors That Can Change C, I, G, NX And Therefore
Can Change AD (continued)
  • Net export
  • 2 factors that can affect investment, such
    as
  • 2. Exchange rate
  • Dollar depreciates.US exports
  • increases and US imports decreases.US
    net
  • exports increases.AD increases
  • Dollar appreciates.US exports
  • decreases and US imports increases.US
    net
  • exports decreases.AD decreases

23
Short Run Aggregate Supply
  • Aggregate supply
  • the quantity supplied of all goods and
    services (Real GDP) at different price levels,
    ceteris paribus.
  • Exhibit 6 Page 162

24
Changes In Short Run Aggregate Supply Shifts In
The SRAS Curve
  • A change in quantity supplied of real GDP is
    brought about by a change in the price level.
  • The factors that can shift the SRAS curve
    include
  • - wage rates,
  • - prices of non labor inputs,
  • - productivity,
  • - supply shock.

25
Wage Rate
  • Exhibit 7 Page 164

26
Prices Of Non Labor Inputs
  • Almost the same as
  • Exhibit 7 Page 164
  • Increase the price non labor input.shift the
    SRAS curve leftward.
  • Decrease the price non labor input.shift the
    SRAS curve rightward.

27
Productivity
  • Increase in productivity.SRAS curve to shift
    right.
  • Decrease in productivity.SRAS curve to shift
    left.

28
Putting AD and SRAS Together Short Run
Equilibrium
  • Exhibit 9 Page 167

29
Thinking In Terms Of Short Run Equilibrium
Changes In The Economy
  • Exhibit 10 Page 167
  • Figure a. An increase AD
  • Figure b. An increase SRAS
  • Figure c. A decrease SRAS

30
Long Run Aggregate Supply (LRAS)
  • LRAS curve
  • The LRAS curve is a vertical line at the
    level of Natural Real GDP.
  • It represents the output the economy produces
    when wages and prices have adjusted to their
    (final) equilibrium levels and neither producers
    nor workers have any relevant misperceptions.
  • Exhibit 13. Page 172

31
  • Natural real GDP
  • the real GDP that it produced at the natural
    unemployment rate. The real GDP that is produced
    when the economy is in long run equilibrium.

32
Short Run Equilibrium, Long Run Equilibrium, And
Disequilibrium
  • Exhibit 14 Page 172

33
Case 1
  • Diagrammatically represent the effect on the
    price level and real GDP in the short run of each
    following
  • a. A decrease in wealth.
  • b. An increase in wage rate.
  • c. A decrease in labor productivity.

34
Case 2
  • Diagrammatically represent the following and
    identify the effect on real GDP and the price
    level in the short run
  • a. An increase in SRAS that is greater than
  • the increase in AD.
  • b. A decrease in AD that is greater than the
  • increase in SRAS.
  • c. An increase in SRAS that is less than the
  • increase in AD

35
Case 3
  • In the following figure, which part is
    representative of each of the following
  • a. A decrease in wage rates.
  • b. An increase in the price level.
  • c. A beneficial supply shock.
  • d. An increase in the price of non labor
  • inputs.

36
Case 4
  • In the following figure, which of the points is
    representative of each of the following
  • a. The lowest real GDP.
  • b. The highest real GDP.
  • c. A decrease in SRAS that is greater than an
  • increase in AD.
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