Chapter 29: Aggregate Demand and Aggregate Supply

Real GDP desired at each price level Inverse relationship Real balances effect Interest effect Foreign purchases effect

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Aggregate Demand and Aggregate Supply29McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Aggregate DemandReal GDP desired at each price levelInverse relationshipReal balances effectInterest effectForeign purchases effectLO129-*Aggregate DemandReal domestic output, GDPPrice levelADLO1029-*Changes in Aggregate DemandReal domestic output, GDPPrice levelAD1AD3AD2LO1029-*Consumer SpendingConsumer wealthHousehold borrowingConsumer expectationsPersonal taxesLO129-*Investment SpendingReal interest ratesExpected returnsExpectations about future business conditionsTechnologyDegree of excess capacityBusiness taxesLO129-*Government SpendingGovernment spending increasesAggregate demand increases (as long as interest rates and tax rates do not change)More transportation projectsGovernment spending decreasesAggregate demand decreasesLess military spendingLO129-*Net Export SpendingNational income abroadExchange ratesDollar depreciationDollar appreciationLO129-*Aggregate SupplyTotal real output produced at each price levelRelationship depends on time horizonImmediate short runShort runLong runLO229-*AS: Immediate Short RunReal domestic output, GDPPrice levelASISRQfImmediate-short-runaggregate supplyP10LO229-*Aggregate Supply: Short RunReal domestic output, GDPPrice level0QfASAggregate supply(short run)LO229-*Aggregate Supply: Long RunReal domestic output, GDPPrice levelASLRQf0Long-runaggregatesupplyLO229-*Changes in Aggregate SupplyDeterminants of aggregate supplyShift factorsCollectively position the AS curveChanges raise or lower per-unit production costsLO229-*Changes in Aggregate SupplyReal domestic output, GDPPrice levelAS1AS3AS20LO229-*Input PricesDomestic resource pricesLaborCapitalLandPrices of imported resourcesImported oilExchange ratesLO229-*ProductivityReal output per unit of inputIncreases in productivity reduce costsDecreases in productivity increase costsLO2Per-unit production cost=total input costtotal outputProductivity=total outputtotal inputs29-*Legal-Institutional EnvironmentLegal changes alter per-unit costs of outputTaxes and subsidiesExtent of government regulationLO229-*EquilibriumReal domestic output, GDP(billions of dollars)Price level (index numbers)10092502510514abADASReal Output Demanded(Billions)Price Level(Index Number)Real OutputSupplied(Billions)$506108$513 508104 512 510100 510 51296 507 51492 5020LO329-*Increases in AD: Demand-Pull InflationReal domestic output, GDPPrice levelAD1ASP1P2Q2Q1QfAD20LO429-*Decreases in AD: RecessionReal domestic output, GDPPrice levelAD1ASP1P2Q1 Q2QfAD2cab0LO429-*Decreases in AS: Cost-Push InflationReal domestic output, GDPPrice levelADAS1P1P2Q1QfAS2ab0LO429-*Increases in AS: Full-EmploymentReal domestic output, GDPPrice levelAD1AS2P1P2 Q2Q1AS1bAD2cP3Q3a0LO429-*