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    Chapter 9 - Aggregrate Demand and Supply

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    Lindcelle Jane Dalope
    This document discusses macroeconomic equilibrium between aggregate demand (AD) and aggregate supply (AS). It defines AD and AS, and explains how they interact to determine equilibrium output and inflation. AD depends on consumption, investment, government spending, and net exports, which can shift due to various economic factors. AS depends on resource prices and productivity in the short run and long run. The intersection of the AD and AS curves indicates macroeconomic equilibrium.

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    Chapter 9 - Aggregrate Demand and Supply

    Uploaded by

    Lindcelle Jane Dalope
    41 views29 pages
    This document discusses macroeconomic equilibrium between aggregate demand (AD) and aggregate supply (AS). It defines AD and AS, and explains how they interact to determine equilibrium output and inflation. AD depends on consumption, investment, government spending, and net exports, which can shift due to various economic factors. AS depends on resource prices and productivity in the short run and long run. The intersection of the AD and AS curves indicates macroeconomic equilibrium.

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    CHAPTER 9 - AGGREGRATE DEMAND AND SUPPLY

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    This document discusses macroeconomic equilibrium between aggregate demand (AD) and aggregate supply (AS). It defines AD and AS, and explains how they interact to determine equilibrium output and inflation. AD depends on consumption, investment, government spending, and net exports, which can shift due to various economic factors. AS depends on resource prices and productivity in the short run and long run. The intersection of the AD and AS curves indicates macroeconomic equilibrium.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    41 views29 pages

    Chapter 9 - Aggregrate Demand and Supply

    Uploaded by

    Lindcelle Jane Dalope
    This document discusses macroeconomic equilibrium between aggregate demand (AD) and aggregate supply (AS). It defines AD and AS, and explains how they interact to determine equilibrium output and inflation. AD depends on consumption, investment, government spending, and net exports, which can shift due to various economic factors. AS depends on resource prices and productivity in the short run and long run. The intersection of the AD and AS curves indicates macroeconomic equilibrium.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 29

    Eco 200 – Principles of

    Macroeconomics

    Chapter 9: Macroeconomic
    Equilibrium (AD/AS)
    Aggregate demand and supply
     Aggregate demand – a relationship
    between the price level and the
    equilibrium quantity of real GDP
    demanded.
     Aggregate supply – a relationship
    between the price level and the
    equilibrium quantity of real GDP
    supplied.
    Macroeconomic equilibrium
    Demand-pull inflation
     Demand-pull inflation is caused by an
    increase in AD
    Business cycle expansion
     As AD rises, output rises, and unemployment
    falls
    Business cycle contraction
     As AD falls, output falls and unemployment
    rises
    Cost-push inflation
     Cost-push inflation is caused by a reduction in
    AS.
    Stagflation
     Rising prices and falling output
    Aggregate demand
     Aggregate demand (AD) consists of spending
    on GDP by:
     consumers (C)
     firms (I)
     the government (G), and
     the foreign sector (X)
     Anything that increases C, I, G, or X at a
    given price level results in an increase in AD.
    Factors affecting Consumption
     Income
     Wealth
     Expected future income and wealth
     Demographics
     Taxes
    Factors affecting Investment
     Interest rate
     Technology
     Cost of capital goods
     Capacity utilization
    Government spending
     Determined by government authorities
    Factors affecting net exports
     Foreign and domestic income
     Foreign and domestic price levels
     Exchange rates
     Government policy (tariffs, trade
    restrictions, etc.)
    Aggregate expenditures
     AE = C+I+G+X
     AE is affected by any factor that
    changes C, I, G, or X.
    Aggregate demand
     Note that AD curve is not the same as
    the demand curve for a particular good
     negative slope is NOT the result of income
    and substitution effects
     Why is it downward sloping?
     Wealth effect
     Interest rate
     International trade effect
    Wealth effect
     As the price level rises:
     the real value of dollar-denominated assets
    decline (real wealth declines)
     this decline in wealth results in a reduction
    in consumption spending
     This affect is also called the real-
    balance effect (or Pigou effect)
    Interest-rate effect
     As the price level rises:
     Individuals must hold more money to pay for
    transactions
     To acquire more money, households sell bonds,
    and other financial assets.
     As more bonds are sold, the price of bonds declines
     A decline in bond prices results in a higher rate of
    return (interest rate) on bonds and other financial
    assets
     A higher interest rate results in a reduction in
    investment and consumption spending
    International trade effect
     As the domestic price level rises:
     Imports become relatively cheaper,
     Exports become relatively more expensive
     Exports decline, imports rise, and net
    exports decline
    Combined price-level effects
     As the price level rises, AE falls due to
    the combined wealth, interest-rate, and
    international trade effects
    Nonprice determinants of AD
     Anything that changes C, I, G, or X at a
    given price level will cause the AD curve
    to shift
     Effects of:
     Expectations (consumer and investor
    confidence)
     Foreign income and price levels
     Government policy
    Aggregate supply
     Price-level effects
     Assumption: Resource prices adjust more
    slowly than output prices
     As price level rises, production becomes
    more profitable and the quantity of output
    supplied rises.
    Aggregate supply
    Short-run Aggregate Supply
    Long-run Aggregate Supply

    Resource and output prices


    are assumed to be flexible in
    the long run. Output =
    potential real GDP.
    Changes in Short-Run AS
     Resource prices
     Technology
     Expectations
    Changes in Long-Run AS
     Changes in the quantity and/or quality
    of resources
     Technology
    Macroeconomic equilibrium
    Short-run effect of an increase
    in AD
    Long-run adjustment process

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