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Chapter 08 Aggregate Demand and Aggregate Supply PowerPoint Presentation
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Chapter 08 Aggregate Demand and Aggregate Supply

Chapter 08 Aggregate Demand and Aggregate Supply

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Chapter 08 Aggregate Demand and Aggregate Supply

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  1. Chapter 08Aggregate Demand and Aggregate Supply

  2. Chapter Outline • Aggregate Demand • Aggregate Supply • Shifts in Aggregate Demand and Aggregate Supply • Causes of Inflation • Supply-Side Economics • How the Government Can Influence (but probably not control) the Economy

  3. Aggregate Demand • Aggregate Demand: the amounts of real domestic output which domestic consumers, businesses, governments, and foreign buyers collectively will desire to purchase at each possible price level

  4. PI AD RGDP Figure 1 Aggregate Demand

  5. Why Aggregate Demand is Downward Sloping • Real Balances Effect • Because higher prices reduce real spending power, prices and output are negatively related. • Foreign Purchases Effect • When domestic prices are high, we will export less to foreign buyers and we will import more from foreign producers. Therefore higher prices leads to less domestic output. • Interest Rate Effect • higher prices lead to inflation which leads to less borrowing and a lowering of RGDP

  6. Aggregate Supply • Aggregate Supply: the level of real domestic output available at each possible price level

  7. AS PI RGDP Figure 2 The Aggregate Supply Curve Classical Range Intermediate Range Keynesian Range

  8. The Ranges of AS • Keynesian Range • Large amounts of unemployment make it so that increases in aggregate demand have no affect on wages or prices. • Classical Range • Full employment makes it so that increases in aggregate demand only increase wages or prices. • Intermediate Range • Some sectors of the economy reach full employment more quickly than others.

  9. Variables that Shift Aggregate Demand • Taxes • Interest Rates • Confidence • Strength of the Dollar • Government Spending

  10. Determinants of AD

  11. PI AS PI’ PI* AD’ AD RGDP* RGDP’ RGDP Figure 3 AD Increases

  12. PI AS PI* PI’ AD AD’ RGDP’ RGDP* RGDP Figure 4 AD Decreases

  13. Variables that Shift AS • Input Prices • Productivity • Government Regulation

  14. Determinants of AS

  15. PI AS AS’ PI* PI’ AD RGDP RGDP* RGDP’ Figure 5 Increase in AS

  16. PI AS’ AS PI’ PI* AD RGDP’ RGDP* RGDP Figure 6 Decrease in AS

  17. Causes of Inflation • Demand Pull Inflation: inflation caused by an increase in aggregate demand • Cost Push Inflation: inflation caused by a decrease in aggregate supply

  18. Government Influence: Aggregate Demand • Government can influence economic activity with aggregate demand side policies affecting: • Taxes • Government Spending • Interest Rates

  19. Government Influence: Aggregate Supply • Government can influence economic activity with aggregate supply side policies affecting • input costs (labor and wage) • reducing regulation • Increase incentives to • Work • Take Risks • The actions are call Supply Side Economics