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11 - 1Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Aggregate Demandand
Aggregate Supply
11C H A P T E R
11 - 2Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Defined: The amounts of real output that buyers collectively desire to purchase at each possible price level
AGGREGATE DEMAND
Aggregate Demand CurveDown Sloping Due To:
•Real-Balances Effect•Interest-Rate Effect•Foreign Purchases Effect
11 - 3Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP1
P1
AE1 at P 1
1
1’
P2
AE2 at P 2
2
2’
AE3 at P 3
3
P3
3’
The Aggregate DemandCan Be Constructed
DERIVATION OF THE AGGREGATE DEMAND CURVE
GDP3GDP2
GDP1GDP3GDP2
AD
11 - 4Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pri
ce le
vel
Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND
AD1
AD2
Aggregate DemandCan Increase
11 - 5Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pri
ce le
vel
Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND
AD1AD3
Aggregate DemandCan Increase …or Decrease
11 - 6Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending• Consumer Wealth• Consumer Expectations• Consumer Indebtedness• TaxesChange in Investment Spending• Real Interest Rates• Expected Returns
• Expected Future Business Conditions
• Technology• Degree of Excess Capacity• Business Taxes
11 - 7Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
DETERMINANTS OF AGGREGATE DEMAND
Government Spending
Net Export Spending• National Income Abroad• Exchange Rates
Changes in Aggregate Demand Shiftsand the Aggregate Expenditures Model
Illustrated…
11 - 8Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Agg
rega
te e
xpen
ditu
res
(bill
ions
of
dolla
rs)
0
0
Pric
e le
vel
GDP2
AE2 at P 2
P1
AE1 at P 1
SHIFTS IN THE AGGREGATE EXPENDITURESSCHEDULE & THE AGGREGATE DEMAND CURVE
GDP1
GDP2GDP1
AD1
AD2
Increase inAggregate
Expenditures
Increase inAggregateDemand
11 - 9Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Higher Price Levels Provide An Incentive to Produce MoreAggregate Supply Has Three Segments or Ranges:
1 - Horizontal Range2 - Intermediate (Upsloping) Range3 - Vertical Range
AGGREGATE SUPPLYDefined: The amounts of real output that firms will produce at each possible price level
11 - 10Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
AGGREGATE SUPPLY
Pric
e le
vel
Real domestic output, GDPQ
P
HorizontalRange
Upsloping orIntermediate
Range
VerticalRange
11 - 11Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
AGGREGATE SUPPLY
Pric
e le
vel
Real domestic output, GDPQ
PAS3AS1AS2
Increase InAggregate
Supply
Decrease InAggregate
Supply
Changes in Aggregate Supply
11 - 12Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input PricesDomestic Resource Availability• Land• Labor• Capital• Entrepreneurial Ability
Prices of Imported GoodsMarket Power
11 - 13Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
DETERMINANTS OF AGGREGATE SUPPLY
Change in Productivity
Productivity =Real Output
Input
Change in Legal-Institutional Environment
• Business Taxes and Subsidies
• Government Regulation
11 - 14Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
Q
P AS
AD
Equilibrium in theIntermediate Range
QeQ1 Q2
EQUILIBRIUM: REAL OUTPUTAND THE PRICE LEVEL
P1
Pe
11 - 15Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
Q
P AS
AD
Equilibrium in theHorizontal Range
QeQ1 Q2
EQUILIBRIUM: REAL OUTPUTAND THE PRICE LEVEL
Pe
11 - 16Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
Q
P AS
AD2
Increasing Demand in the Horizontal Range
Q1 Q2
CHANGES IN EQUILIBRIUM
P1
AD1
11 - 17Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
Q
P AS
AD4
Increasing Demand in the Intermediate Range
Q3 Q4
CHANGES IN EQUILIBRIUM
P3
AD3
P4
11 - 18Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
Q
P AS
AD6
Increasing Demand in the Vertical Range
Qc
CHANGES IN EQUILIBRIUM
P5
AD5
P6
11 - 19Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
AS
AD2
Inflation and the Multiplier
GDP1 GDP2
MULTIPLIER WITHPRICE-LEVEL CHANGES
P1
AD1
AD3
GDP3
P2
Full MultiplierEffect Reduced
MultiplierEffect Dueto Inflation
11 - 20Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Decreasing Demand That Causes A Recession
DECREASES IN AD AND RECESSION
•Wage Contracts•Morale, Effort, and Productivity•Efficiency Wages
•Minimum Wage•Menu Costs•Fear of Price Wars
Recession and Cyclical Unemployment
11 - 21Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
AS
AD1
Decreasing Demand That Causes A Recession
Q2 Q1
DECREASES IN AD AND RECESSION
P1
AD2
11 - 22Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
AS1
AD
Decreasing Supply That Causes A Recession
Q2 Q1
DECREASES IN AD AND RECESSION
P1
P2
AS2
11 - 23Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
AS2
Increasing Supply: Full-Employment and Price-Level Stability
Q2 Q3
INCREASES IN AS AND INFLATION
P1
P3
AS1
AD1
AD2
P2
Q1
11 - 24Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Pric
e Le
vel
Real Domestic Output, GDP
AS2
Increasing Supply: Full-Employment and Price-Level Stability
Q2 Q3
INCREASES IN AS AND INFLATION
P1
P3
AS1
AD1
AD2
P2
Q1
ChapterConclusions
ENDBACK
aggregate demand-aggregate supply (AD-AS) modelaggregate demandreal-balances effectinterest-rate effectforeign purchases effectdeterminants of aggregate
demandaggregate supplyhorizontal range (of AS
curve)
intermediate range (of AS curve)
vertical range (of AS curve)
determinants of aggregate supply
productivity
equilibrium price level
equilibrium real output
efficiency wages
menu costs
Copyright McGraw-Hill/Irwin, 2002
11 - 26Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule and Curve
Aggregate Supply
Equilibrium Real Output & Price Level
Changes in Equilibrium
Multiplier & Price Changes
Changes in AD & AS
Key Terms
PreviousSlide
NextSlide
EndShow
Coming next... FISCAL
POLICY
Chapter 12