Transcript Aggregate demand and supply

Aggregate demand and supply
• Aggregate supply is the quantity of output firms
are willing to supply, for each given price level.
• Aggregate supply is the aggregate of all the
supply in the economyIt shows the relationship
between the price level and real output (or real
national income).
• Aggregate demand is the combination of price
level and output at which the goods and money
market are both in equilibrium.
Classical Aggregate supply curve
• The classical supply curve is based on the
assumption that the labour market is in
equilibrium with full employment of the
labour force.
• AS curve is vertical in the long run.
Keynesian Aggregate supply curve
• AS curve is horizontal- firms will supply
whatever is demanded at the existing price
level.
• Keynes assumed that there is unemployment
and output can be increased by increasing
labour.
• There is short-run price stickiness.
• As a result, the AS curve is quite flat in the
short run.
Aggregate demand
• Aggregate demand is the combination of price
level and output at which the goods and
money market are both in equilibrium.
• Aggregate demand depends on output and
price level by way of real money supply.
Why is the AD curve downward
sloping?
• Interest rates: If the price level rises, the rate of
interest rises in an effort to stop the price rise
getting out of hand. So, in response to a rise in
the price level, the final effect is a fall in planned
consumption and investment, and so a reduction
in AD
• Changes in real wealth:
• The foreign sector: For a given exchange rate, if
the price level rises, then home produced goods
will become relatively more expensive in other
countries, and so the demand for exports will fall.
Shifts in the AD curve
•
•
•
•
•
•
•
•
C,I,G,NX
Interest rates
Unemployment:
Taxation
Government spending
The stock market
Business confidence
The exchange rate
Aggregate demand under Keynesian
case
P
AS
AD2
AD1
Aggregate demand under Classical
case
Aggregate Supply
• The Short-run aggregate supply curve:
· Slopes upwards because at higher prices, firms respond by producing a
greater quantity of output
· As price level falls, firms respond by cutting back on output
The slope of the SRAS: the SRAS is relatively flat at low levels of Y and
relatively steep at high levels of Y, BECAUSE:
· At low levels of output (when UE is high), firms are able to attract new
workers without driving up wages and other costs, thus prices rise
gradually as firms increase output
· At high levels of output, when resources in the economy are more fully
employed, firms find it costly to increase output as they must pay higher
wages and other costs. Increases in output are accompanied by greater
and greater levels of inflation as an economy approaches and passes full
employment
Equilibrium income