Lecture Macroeconomics - Chapter 9: Aggregate demand and aggregate supply

Chapter 9 - Aggregate demand and aggregate supply. After studying this chapter you will be able to understand: Why the aggregate demand curve is downward sloping, and what factors shift the entire curve; what determines the shape of the short run aggregate supply curve, and what factors shift the entire curve; how the equilibrium price level and real GDP are determined; the distinction between the short-run and long-run supply curve; the nature and causes of recessionary and inflationary gaps.

Aggregate Demand and Aggregate Supply Chapter SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter In this chapter you will learn Why the aggregate demand curve is downward sloping, and what factors shift the entire curve What determines the shape of the short run aggregate supply curve, and what factors shift the entire curve How the equilibrium price level and real GDP are determined © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter In this chapter you will learn The distinction between the short-run and long-run supply curve The nature and causes of recessionary and inflationary gaps © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Aggregate Demand Aggregate Supply: The Short Run Equilibrium: Real Output & the Price Level Short-Run & Long-Run Aggregate Supply Equilibrium vs Full-Employment GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Aggregate Demand (AD): The amounts of real output that buyers collectively desire to purchase at each possible price level AD = C + Ig + G + Xn © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Aggregate Demand (AD) Aggregate Quantity Demanded (Real GDP) and the Price Level are inversely related as follows: Price Level Figure - AD Real GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Aggregate Demand (AD) is downsloping because of the following effects of a change in price level: - Real-balances Effect - Interest-rate Effect - Foreign Trade Effect Remember: these effects are caused by price level changes © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter CHANGES IN AGGREGATE DEMAND Figure - Price level AD Can Increase AD1 Real domestic output, GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter CHANGES IN AGGREGATE DEMAND Figure - Price level AD Can Increase shift RIGHT AD2 AD1 Real domestic output, GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 9 CHANGES IN AGGREGATE DEMAND Figure - Price level AD Can Decrease AD1 Real domestic output, GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 10 Chapter Topics Aggregate Demand Aggregate Supply: The Short Run Equilibrium: Real Output & the Price Level Short-Run & Long-Run Aggregate Supply Equilibrium vs Full-Employment GDP © 2002 McGraw-Hill Ryerson Ltd 58 Macroeconomics, Chapter 58 Equilibrium GDP There is no guarantee, in the short run, that equilibrium GDP will be full-employment GDP © 2002 McGraw-Hill Ryerson Ltd 59 Macroeconomics, Chapter 59 Recessionary Gap A recessionary gap occurs when AD is too low, and equilibrium GDP is below potential GDP © 2002 McGraw-Hill Ryerson Ltd 60 Macroeconomics, Chapter 60 Figure - 10 Recessionary Gap Price level Potential GDP AS Recessionary Gap = 20 P0 AD0 P1 AD1 490 © 2002 McGraw-Hill Ryerson Ltd 510 Real GDP Macroeconomics, Chapter 61 Inflationary Gap An inflationary gap occurs when AD is too high, and equilibrium GDP is above potential GDP © 2002 McGraw-Hill Ryerson Ltd 62 Macroeconomics, Chapter 62 Figure - 10 Inflationary Gap Potential GDP Price level AS Inflationary Gap = 20 P1 AD2 P0 AD0 510 © 2002 McGraw-Hill Ryerson Ltd 530 Real GDP Macroeconomics, Chapter 63 Chapter Topics Aggregate Demand Aggregate Supply: The Short Run Equilibrium: Real Output & the Price Level Short-Run & Long-Run Aggregate Supply Equilibrium vs Full-Employment GDP © 2002 McGraw-Hill Ryerson Ltd 64 Macroeconomics, Chapter 64 Aggregate Demand and Aggregate Supply Chapter Appendix SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE © 2002 McGraw-Hill Ryerson Ltd 65 Macroeconomics, Chapter 65 Derivation of AD Curve AD can be derived from the Aggregate Expenditures Model illustrated… © 2002 McGraw-Hill Ryerson Ltd 66 Macroeconomics, Chapter 66 (C a + I g + X n + G) at P 1 Price level Aggregate expenditures (billions of dollars) Figure A9 - P1 © 2002 McGraw-Hill Ryerson Ltd GDP1 1' What if prices go Real GDP up? Real GDP at price level Real GDP GDP1 Macroeconomics, Chapter 67 Price level Aggregate expenditures (billions of dollars) Figure A9 - (C a + I g + X n + G) at P (C a + I g + X n + G) at P 2 P2 P1 GDP2 GDP1 What What ifif prices prices go go Real GDP up up again? again? 2' 1' A Lower Real GDP at price level Real GDP © 2002 McGraw-Hill Ryerson Ltd GDP2 GDP1 Macroeconomics, Chapter 68 Price level Aggregate expenditures (billions of dollars) Figure A9 - (C a + I g + X n + G) at P (C a + I g + X n + G) at P (C a + I g + X n + G) at P 3 P3 P2 P1 GDP3 GDP2 GDP1 Real GDP 3' 2' 1' A Still Lower Real GDP Level at price level Real GDP GDP3 GDP2 GDP1 © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 69 Price level Aggregate expenditures (billions of dollars) Figure A9 - (C a + I g + X n + G) at P (C a + I g + X n + G) at P (C a + I g + X n + G) at P 3 P3 P2 P1 Real GDP GDP3 GDP2 GDP1 3' 2' Aggregate Demand can be derived from AE 1' Real GDP GDP3 GDP2 GDP1 © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 70 Shifts in AD and shifts in Aggregate Expenditure illustrated… © 2002 McGraw-Hill Ryerson Ltd 71 Macroeconomics, Chapter 71 Price level Aggregate expenditures (billions of dollars) Figure A9 - AE2 at P AE1 at P An Increase in Aggregate Expenditures P1 GDP1 GDP2 Real GDP An Increase in Aggregate Demand AD2 AD1 Real GDP GDP GDP Macroeconomics, Chapter © 2002 McGraw-Hill Ryerson Ltd 72 ... McGraw-Hill Ryerson Ltd 24 Macroeconomics, Chapter 24 Chapter Topics Aggregate Demand Aggregate Supply: The Short Run Equilibrium: Real Output & the Price Level Short-Run & Long-Run Aggregate Supply. .. Ryerson Ltd 14 Macroeconomics, Chapter 14 Chapter Topics Aggregate Demand Aggregate Supply: The Short Run Equilibrium: Real Output & the Price Level Short-Run & Long-Run Aggregate Supply Equilibrium... McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Aggregate Demand (AD) is downsloping because of the following effects of a change in price level: - Real-balances Effect - Interest-rate Effect - Foreign