Chapter 34

Aggregate Demand
and
Aggregate Supply
Field Trip
SAMA
Permission Form
Tuesday April 30
Key Terms
recession
depression
natural rate of output
stagation
Economic Cycle
Fluctuations
Economic Cycle
AD-AS Model
Aggregate Demand
and
Aggregate Supply
Recession
A period of declining real
incomes and rising
unemployment dened as
negative growth for two
quarters (six months)
Depression
Severe recession
Three Key Facts
Irregular and Unpredictable
Variables uctuate together
Output falls - Unemployment
increases
Variables
GDP
Financial System
Interest Rates
Unemployment
Monetary System
Trade Balance
Real - Quantities
Nominal - Money
Classical View
Real qualities matter
Amount of money does
not matter
New View
Real qualities
interact with
nominal money
Long Run and Short Run
Good in the short run
Bad in the long run
Bad in the short run
Good in the long run
Lag
Time between cause
and effect
Price
Level
Quantity of Output
Equilibrium
price
level
Equilibrium
output
AD- AS Model
Aggregate
Demand
Aggregate
Supply
Price
Level
Quantity of Output
Why does the demand curve
slope downward?
Price
Level
Quantity of Output
Y
1
Aggregate Demand
Y
2
P
1
P
2
1. real wealth increases
2. interest rates fall
3. exchange rates depreciate
increase spending
increase investments
increase exports
Price Level
Consumption - Wealth Effect
Investment - Interest-Rate Effect
Net Exports - Exchange-Rate Effect
Wealth Effect
Lower prices
Buy more stuff
Increase output
Higher prices
Buy less stuff
Decrease output
Nominal - always one riyal - xed
Real - what it will buy - varies
Lower prices
Need less money
More money to loan
Lower rates
Borrow easy
Buy more stuff
Increase output
Interest Rate Effect
Higher prices
Need more money
Less money to loan
Higher rates
Borrow harder
Buy less stuff
Decrease output
Exchange-Rate Effect
Lower prices
Cause interest rates to decline
Causes currency to depreciate
Stimulates demand for local
currency
Stimulates exports
Increases local output
Higher prices
Cause interest rates to increase
Causes currency to appreciate
Stimulates demand for foreign
currency
Stimulates imports
Decreases local output
Price
Level
Quantity of Output
Demand Shift
change in consumption
change in investment
government purchases
net exports
Quiz 1
1. Name three reasons why the Aggregate-
Demand Curve slopes downward.
2. Name four reasons why the Aggregate-
Demand Curve shifts
Wealth, Interest Rate, Exchange Rate
Consumption, Investment, Government, Net
Exports (C + I + G + NX)
Aggregate Demand Curve
Slopes Downward
Wealth
Interest Rate
Exchange Rate
Shifts
Consumption
Investment
Government
Net Exports
Aggregate Supply Curve
Two Curves
Short Run
Long Run
Two Supply Curves
Short Run
Long Run
Short Run
Adrenaline
Give 110%
Push to exceed normal
capacity
Long Run
Run out of Adrenaline
Fall back to normal
Cannot do 110% forever
unless.....
Long Run Supply Curve
New Capital
Human
Physical
Intellectual
Financial
Cultural
Price
Level
Quantity of Output
Two Supply Curves
Short-Run
Aggregate
Supply
Long-Run
Aggregate
Supply
Price change
does not
affect the
quantity of
goods and
services
P
Price
Level
Quantity of Output
P
1
AD- AS Model
Aggregate
Demand
Short Run
Aggregate
Supply
Y
1
Y
2
P
2
Long Run
Aggregate
Supply
P
3
New Capital
Human
Physical
Intellectual
Financial
Cultural
Price
Level
Quantity of Output
Two Supply Curves
LRAS
1
Y
1
LRAS
2
Y
3
LRAS
3
Y
3
New Capital
Human
Physical
Intellectual
Financial
Cultural
Price
Level
Quantity of Output
Two Supply Curves
LRAS
1
Y
1
LRAS
2
Y
3
LRAS
3
Y
3
P
1
P
2
P
3
1. Name three reasons why the Short-Run
Aggregate-Supply Curve slopes upward.
2. Name four reasons why the Short-Run
Aggregate-Supply Curve shifts
Sticky Wage, Sticky Price, Misperceptions
Capital (5 things) Expected Price Level
Quiz 2
4 Step Analysis
1. Decide what curve the event affects.
2. Decide direction of the shift
3. Diagram impact
4. Analyze short-run to long-run
Stagation
A period of falling output
and rising prices
Remember
1. Three curves: AD, SRAS, LRAS
2. Event can affect one or more of the
curves
3. Determine which curve and which
direction.
4. Diagram impact
Price
Level
Quantity of Output
AD- AS Model
Aggregate
Demand
Short Run
Aggregate
Supply
Long Run
Aggregate
Supply
What if?
1. New technological innovation?
2. Large increase in money supply?
3. People become worried about the
future?
4. The supply of oil is suddenly reduced?
What Shifts Aggregate Demand?
1. Consumption - tax cut/increase, stock
market increase/decrease
2. Investment - interest rate decrease/
increase
3. Government Purchases - More or Less
4. Net Exports - tied to exchange rates
What Shifts Short Run
Aggregate Supply?
1. Capital: Cultural, Physical, Financial,
Human, Intellectual
2. Expectations: decrease-right, increase-
left
Can you have a nominal change
but not a real change?
Price level changes but output
stays the same