Transcript Chapter 8 PowerPoint Presentation

Chapter 8
Aggregate Demand and
Aggregate Supply
McGraw-Hill/Irwin
© 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter Outline
• Aggregate Demand
• Aggregate Supply
• Shifts in Aggregate Demand and
Aggregate Supply
• Causes of Inflation
• Supply-Side Economics
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© 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
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
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© 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Figure 1 Aggregate Demand
PI
AD
RGDP
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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
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Aggregate Supply
• Aggregate Supply: the level of real
domestic output available at each
possible price level
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Figure 2 The Aggregate
Supply Curve
PI
Classical
Range
Intermediate
Range
Keynesian Range
RGDP
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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.
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Variables that Shift Aggregate
Demand
•
•
•
•
•
Taxes
Interest Rates
Confidence
Strength of the Dollar
Government Spending
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Determinants of AD
Variable
GDP Component Effect of an
Affected
increase on
C,I,G,X
AD
Effect of a
decrease on
AD
Taxes
C,I
Increase so
AD =>
Increase so
AD =>
Decrease so
AD <=
Increase so
AD =>
Decrease so
AD <=
Interest Rates C,I
Confidence
C,I
Strength of
the Dollar
X (exportsimports)
Government
Spending
G
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Decrease so
AD <=
Decrease so
AD <=
Increase so
AD =>
Decrease so
AD <=
Increase so
AD =>
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Figure 3 AD Increases
PI
AS
PI’
PI*
AD’
AD
RGDP*
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RGDP’
RGDP
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Figure 4 AD Decreases
PI
AS
PI*
PI’
AD
AD’
RGDP’
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RGDP*
RGDP
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Variables that Shift AS
• Input Prices
• Productivity
• Government Regulation
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Determinants of AS
Variable
Effect of an
Increase on AS
Effect of an
Decrease on AS
Input Prices
Decrease so
AS
Increase so
AS
Decrease so
AS
Increase so
AS
Decrease so
AS
Increase so
AS
Productivity
Government
Regulation
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Figure 5 Increase in AS
PI
AS
AS’
PI*
PI’
AD
RGDP*
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RGDP’
RGDP
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Figure 6 Decrease in AS
PI
AS’
AS
PI’
PI*
AD
RGDP’
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RGDP*
RGDP
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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
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Supply-Side Economics
• Supply-side economics: government
policy intended to influence the
economy via aggregate supply by
lowering input costs and reducing
regulation
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© 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.