THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 654

622 PA R T V I I Monetary Theory increase in the quantity of aggregate demand (Yad c), shifting the aggregate demand curve to the right from AD1 to AD2.2 In contrast to the quantity theory, the components approach suggests that other factors (manipulation of government spending and taxes, changes in net exports, and changes in consumer and business spending) are also important causes of shifts in the aggregate demand curve For instance, if the government spends more (G c) or net exports increase (NX c), the quantity of aggregate output demanded at each price level rises, and the aggregate demand curve shifts to the right A decrease in government taxes (T *) leaves consumers with more income to spend, so consumer expenditure rises (C c) The quantity of aggregate output demanded at each price level also rises, and the aggregate demand curve shifts to the right Finally, if consumer and business optimism increases, consumer expenditure and planned investment spending rise (C c, I c), again shifting the aggregate demand curve to the right John Maynard Keynes described these waves of optimism and pessimism as animal spirits and considered them a major factor affecting the aggregate demand curve and an important source of business cycle fluctuations Summary You have seen that both the quantity theory and components approaches to aggregate demand agree that the aggregate demand curve slopes downward and shifts in response to changes in the money supply However, in the quantity theory approach there is only one important source of movements in the aggregate demand curve changes in the money supply The components approach suggests that other factors fiscal policy, net exports, and animal spirits are equally important sources of shifts in the aggregate demand curve Our discussion of quantity theory and components approaches indicates that six factors can shift the aggregate demand curve: the money supply, government spending, net exports, taxes, consumer optimism, and business optimism the last two ( animal spirits ) affecting willingness to spend The possible effect on the aggregate demand curve of these six factors (often referred to as demand shocks) is summarized in Table 24-1 AG GRE G AT E SU P PLY To complete our analysis we need to derive an aggregate supply curve, the relationship between the quantity of output supplied and the price level In the typical supply and demand analysis, we have only one supply curve, but because prices and wages take time to adjust to their long-run level, the aggregate supply curve differs in the short and the long runs First, we examine the long-run aggregate supply curve We then derive the short-run aggregate supply curve and see how it shifts over time as the economy moves from the short run to the long run Long-Run Aggregate Supply Curve The amount of output that can be produced in the economy in the long run is determined by the amount of capital in the economy, the amount of labour supplied at full employment, and the available technology As discussed in Chapter 18, some unemployment cannot be helped because it is either frictional or structural Thus full employment is not at zero, but is rather at a level above zero at which the demand for labour equals the supply of labour This natural rate of unemployment is A complete demonstration of the components approach to the aggregate demand curve is given in Chapters 22 and 23