Transcript Lecture 16

Chapter 11:
Aggregate Demand (AD) and
Aggregate Supply (AS)
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What is demand?


AD: a curve that shows the amount of
outputs that buyers want to purchase at
each possible price.
The relationship between quantity
demanded and the price level is
negative: an increase in aggregate
price level reduces quantity demanded.
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
The AD deals with all goods and
services that are produced in the
economy in a given year.
AD = C + I + G + Xn

This is a GDP demand

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The AD Curve
P
AD
Q=GDP
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Changes in Price Level:


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
Leads to move along the AD curve:
An increase in (P) leads to a decrease in
Qd
A decrease in (P) leads to an increase in
Qd
This is the only factor that leads to a
move along the AD curve.
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Determinants of AD:
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Any change in these factors leads to a
shift in the AD upward or downward.
Recall that AD = C + I + G + Xn
Therefore, any change in these
components will leads to a change in
AD
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1.
A.
B.
C.
D.
Consumer Spending (C):
Consumer wealth
Consumer expectations
Debt
Taxes
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
A.
B.
C.
D.
E.
2. Investment Spending (I):
Real interest rate
Expected return
Expectations
Technology
Inventories
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3. Government Spending (G):
4. Net Exports (Xn)
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The AD Curve
P
AD
Q=GDP
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Aggregate Supply (AS)
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What is supply?
a schedule or curve that shows the
amount of outputs that firms willing to
produce at each possible price.
The relationship between quantity
supplied and the price level is positive:
an increase in aggregate price level
increases quantity supplied
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

The AS shows all goods and services
that are produced in the economy in a
given year.
This is a GDP supply
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AS Curve
P
AS
Q=GDP
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Changes in Price Level




Leads to move along the AS curve:
An increase in (P) leads to an increase
in Qs
A decrease in (P) leads to a decrease in
Qs
This is the only factor that leads to a
move along the As curve.
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Determinants of AS
1.
2.
3.
4.
Input prices
Taxes and subsidies
Technology
Government regulations
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The Equilibrium
P
AD
AS
Q=GDP
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AS in the short and Long Run
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Short-run: when at least one production
factor is constant (cannot be changed)
Long-run: when all production factors
are variable (can be changed)
This will give up two different AS curves
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

In the (SR), since some factors are
constant, we cannot reach our full
production capacity, the AS curve is
positively slopped.
In the (LR), since all factors are
variable, we assume that we reached
our full production capacity, the AS
curve is vertical.
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AS Curve
P
LRAS
SRAS
FE
Q=GDP
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The Equilibrium: AS = AD
P
AD
AD
FE
Q=GDP
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