Aggregate Demand and Aggregate Supply. Aggregate Demand. Not the same as “Demand” that you learned about in Chapter 3!
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
Aggregate Demand • Not the same as “Demand” that you learned about in Chapter 3! • Aggregate Demand is the curve/schedule that shows the amount of Total goods/services desired (demanded) at various price levels by consumers, businesses, government, and foreign buyers • More of a generalization that “demand” as we learned it in chapter 3….
Other difference between Demand and Aggregate Demand • The Graph….
Why is there an inverse relationship between price level and GDP? • Wealth Effect - Higher prices = lower purchasing power, vice versa • Interest-Rate Effect - Higher prices = higher interest rates = less investment = less production (GDP) • Foreign Purchases Effect - Higher prices in U.S = decreased demand for domestic goods/services = increased imports, decreased net exports = decrease in GDP
Determinants of Aggregate Demand Things that shift the AD curve: • Change in consumer spending • Consumer wealth • Consumer expectations • Household indebtedness • taxes • Change in Government spending
Change in investment spending • Interest rates • Profit expectations on investment projects • Business taxes • Technology • Degree of excess capacity • Change in net export spending
Aggregate Supply • Not the same as “supply” from Chapter 3! • AS is the curve/schedule showing the real gdp produced at each price level • The graph has three segments that are IMPORTANT to understand!!!! • Graph and Stinger…
Determinants of Aggregate Supply • Change in input prices - land, labor, capital, E.A. 2. Change in productivity = output / input 3. Change in legal-institutional environment • taxes/subsidies • Government regulations
Increase in AD on the AS curve - • Depending on the range of the AS curve you are in, price level/Output will increase • The multiplier applies to this increase, but the multiplier is weakened by Price Level increases • Any increase in AD leads to an increase in Real GDP. However, the larger the increase in PL, the smaller the increase in Real GDP • In the intermediate and Vertical range, an increase in demand constitutes DEMAND-PULL INFLATION!!!
What about when AD decreases? • Rule of thumb—prices and wages are “flexible” upwards but “inflexible” downwards. • This means that price level will gladly raise, but does not want to lower with a reduction in output….this is called the ratchet effect!
So, as a result of the ratchet effect • When AD decreases, PL stays constant but production/output decreases…. • This explains why prices stay stable/high during times of economic recession (like now) • Get it????