11 - 1Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Aggregate Demandand

Aggregate Supply

11C H A P T E R

Click To GoTo Appendix

11 - 2Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Defined: •Amounts of Real Output•Buyers Collectively Desire •At Each Possible Price Level

AGGREGATE DEMAND

Aggregate Demand CurveDown Sloping Due To:

•Real-Balances Effect•Interest-Rate Effect•Foreign Purchases Effect

Graphically…

11 - 3Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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AGGREGATE DEMAND CURVE

Pri

ce le

vel

Real domestic output, GDP

AD

11 - 4Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Pri

ce le

vel

Real domestic output, GDP

CHANGES IN AGGREGATE DEMAND

AD1

AD2

Aggregate DemandCan Increase

11 - 5Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Pri

ce le

vel

Real domestic output, GDP

CHANGES IN AGGREGATE DEMAND

AD1AD3

…or Decrease

Aggregate DemandCan Increase

11 - 6Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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DETERMINANTS OF AGGREGATE DEMAND

Change in Consumer Spending•Consumer Wealth•Consumer Expectations•Household 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, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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DETERMINANTS OF AGGREGATE DEMAND

Government Spending

Net Export Spending• National Income Abroad• Exchange Rates

11 - 8Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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AGGREGATE SUPPLYDefined: •Levels of Real Domestic Output•At Each Possible Price Level•Long-run Supply Curve

•Wages and Resource Prices Match Price Level

•Short-run Supply Curve•Wages and Resource Prices Do Not Match Price Level

11 - 9Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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AGGREGATE SUPPLY

Pric

e le

vel

Real domestic output, GDPQ

PLong Run

ASLR

Long-runAggregate

Supply

Qf

Full-Employment

11 - 10Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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AGGREGATE SUPPLY

Pric

e le

vel

Real domestic output, GDPQ

PShort Run

ASAggregate

SupplyShort-run

Qf

Full-Employment

11 - 11Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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AGGREGATE SUPPLY

Pric

e le

vel

Real domestic output, GDPQ

P AS3

AS1

AS2

Increase InAggregate

Supply

Decrease InAggregate

Supply

Changes in Aggregate Supply

11 - 12Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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DETERMINANTS OF AGGREGATE SUPPLY

Input Prices

Domestic Resource Prices•Labor•Land•Capital

Prices of Imported Goods

Market Power

11 - 13Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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DETERMINANTS OF AGGREGATE SUPPLY

Productivity

Productivity =Total Output

Total Inputs

Legal-Institutional Environment

• Business Taxes and Subsidies

• Government Regulation

11 - 14Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Pric

e Le

vel

Real Domestic Output, GDP

Q

P AS

AD510

502514

EQUILIBRIUM AND CHANGESIN EQUILIBRIUM

92

100a b

EquilibriumReal Output

11 - 15Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Pric

e Le

vel

Real Domestic Output, GDP

Q

P ASAD1

INCREASES IN AD: DEMAND-PULL INFLATION

P2

P1

AD2

Qf Q1 Q2

11 - 16Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Pric

e Le

vel

Real Domestic Output, GDP

Q

P ASAD1

DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT

P1

AD2

QfQ1

a

c

b

11 - 17Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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•Wage Contracts•Morale, Effort, and Productivity•Efficiency Wages

•Minimum Wage•Menu Costs•Fear of Price Wars

DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT

11 - 18Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Pric

e Le

vel

Real Domestic Output, GDP

Q

P AS1

AD1

DECREASES IN AS: COST-PUSH INFLATION

P2

QfQ1

a

b

AS2

P1

11 - 19Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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Pric

e Le

vel

Real Domestic Output, GDPQ

P AS1

AD1

INCREASES IN AS: FULL EMPLOYMENT

P1

Q2Q1

a

b

AS2

P2

…With Price-Level Stability

AD2

P3

Q3

ENDBACK

aggregate demand-aggregate supply (AD-AS) modelaggregate demandreal-balances effectinterest-rate effectforeign purchases effectdeterminants of aggregate demandaggregate supplylong-run aggregate supply curve

short-run aggregate supply curve

determinants of aggregate supply

productivity

equilibrium price level

equilibrium real output

efficiency wages

menu costs

Copyright McGraw-Hill/Irwin, 2005

11 - 21Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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RELATIONSHIP OF THE AGGREGATE DEMAND CURVE TO THE AGGREGATE

EXPENDITURES MODEL

Derivation of theAggregate Demand Curve

from the Aggregate Expenditures Model

Illustrated…

CHAPTER 11 - Appendix

11 - 22Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Agg

rega

te e

xpen

ditu

res

(bill

ions

of

dolla

rs)

0

0

Pric

e le

vel

Q1

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

Q3 Q2

Q1Q3 Q2

ADClick To ReturnTo Presentation

Real Domestic Output

11 - 23Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Agg

rega

te e

xpen

ditu

res

(bill

ions

of

dolla

rs)

0

0

Pric

e le

vel

Q2

AE2 at P 1

P1

AE1 at P 1

SHIFTS IN THE AGGREGATE EXPENDITURESSCHEDULE & THE AGGREGATE DEMAND CURVE

Q1

Q2Q1

AD1

AD2

Increase inAggregate

Expenditures

Increase inAggregateDemand

Click To ReturnTo Presentation

Real Domestic Output

11 - 24Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

PreviousSlide

NextSlide

EndEndShowShow

Agg

rega

te e

xpen

ditu

res

(bill

ions

of

dolla

rs)

0

0

Pric

e le

vel

Q2

AE2 at P 1

P1

AE1 at P 1

SHIFTS IN THE AGGREGATE EXPENDITURESSCHEDULE & THE AGGREGATE DEMAND CURVE

Q1

Q2Q1

AD1

AD2

Increase inAggregate

Expenditures

Increase inAggregateDemand

Click To ReturnTo Presentation

Real Domestic Output

Any

Questions?

11 - 25Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand

Changes in AD

Determinants of AD

Aggregate Supply

Determinants of AS

Equilibrium & Changes in Equilibrium

Appendix

Key Terms

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EndEndShowShow

Coming next... FISCAL

POLICYChapter 12