THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 651

CHAPTER 24 Aggregate Demand and Supply Analysis LE A RNI NG OB JE CTI VE S After studying this chapter you should be able to discern between monetarist and Keynesian views of aggregate demand interpret the aggregate demand and supply framework for the determination of aggregate output and the price level differentiate between short-run and long-run equilibria in the context of the aggregate demand and supply framework PRE VI EW In earlier chapters we focused considerable attention on monetary policy because it touches our everyday lives by affecting the prices of the goods we buy and the quantity of available jobs In this chapter we develop a basic tool, aggregate demand and supply analysis, which will enable us to study the effects of monetary policy on output and prices Aggregate demand is the total quantity of an economy s final goods and services demanded at different price levels Aggregate supply is the total quantity of final goods and services that firms in the economy want to sell at different price levels As with other supply and demand analyses, the actual quantity of output and the price level are determined by equating aggregate demand and aggregate supply Aggregate demand and supply analysis will enable us to explore how aggregate output and the price level are determined (The Financial News box, Aggregate Output, Unemployment, and the Price Level, indicates where and how often data on aggregate output and the price level are published.) Not only will the analysis help us interpret recent episodes in the business cycle, but it will also enable us to understand the debates on how economic policy should be conducted AG GRE G ATE D EM AN D The first building block of aggregate supply and demand analysis is the aggregate demand curve, which describes the relationship between the quantity of aggregate output demanded and the price level when all other variables are held constant Aggregate demand is made up of four component parts: consumer expenditure, the total demand for consumer goods and services; planned investment spending,1 the total planned spending by business firms on new machines, facto1 Recall that economists restrict use of the word investment to the purchase of new physical capital, such as a new machine or a new house, which adds to expenditure 619