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Aggregate Demand and Aggregate Supply

11. C H A P T E R. Aggregate Demand and Aggregate Supply. Click To Go To Appendix. AGGREGATE DEMAND. Defined: Amounts of real output buyers collectively desire at each possible price level. Graphically…. AGGREGATE DEMAND CURVE. Price level. AD. Real domestic output, GDP.

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Aggregate Demand and Aggregate Supply

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  1. 11 C H A P T E R Aggregate Demand and Aggregate Supply Click To Go To Appendix

  2. AGGREGATE DEMAND • Defined: • Amounts of real output buyers collectively desire at each possible price level. Graphically…

  3. AGGREGATE DEMAND CURVE Price level AD Real domestic output, GDP

  4. CHANGES IN AGGREGATE DEMAND Aggregate Demand Can Increase Price level AD2 AD1 Real domestic output, GDP

  5. CHANGES IN AGGREGATE DEMAND Aggregate Demand Can Increase …or Decrease Price level AD1 AD3 Real domestic output, GDP

  6. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer Wealth • Consumer Expectations • Household Indebtedness • Taxes Change in Investment Spending • Real Interest Rates • Expected Returns • Expected Future Business Conditions • Technology • Degree of Excess Capacity • Business Taxes

  7. DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending • National Income Abroad • Exchange Rates

  8. AGGREGATE SUPPLY • Defined: • Levels of real domestic output at each possible price level. • Long-run Supply Curve • Short-run Supply Curve

  9. AGGREGATE SUPPLY Long Run P ASLR Price level Long-run Aggregate Supply Full-Employment Q Qf Real domestic output, GDP

  10. AGGREGATE SUPPLY Short Run P AS Aggregate Supply Short-run Price level Full- Employment Q Qf Real domestic output, GDP

  11. AGGREGATE SUPPLY Changes in Aggregate Supply P AS3 AS1 Decrease In Aggregate Supply AS2 Price level Increase In Aggregate Supply Q Real domestic output, GDP

  12. DETERMINANTS OF AGGREGATE SUPPLY Input Prices • Domestic Resource Prices • Labor • Land • Capital • Prices of Imported Goods • Market Power

  13. Total Output Productivity = Total Inputs DETERMINANTS OF AGGREGATE SUPPLY Productivity Legal-Institutional Environment • Business Taxes and Subsidies • Government Regulation

  14. INCREASES IN AD: DEMAND-PULL INFLATION P AS AD1 AD2 P2 Price Level P1 Q Q2 Q1 Qf Real Domestic Output, GDP

  15. DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT AD2 AD1 P AS b a P1 Price Level c Q Q1 Qf Real Domestic Output, GDP

  16. DECREASES IN AS: COST-PUSH INFLATION AS2 P AS1 b P2 Price Level a P1 AD1 Q Q1 Qf Real Domestic Output, GDP

  17. INCREASES IN AS: FULL EMPLOYMENT …With Price-Level Stability P AS1 AS2 P3 b P2 P1 a Price Level AD2 AD1 Q Q1 Q2 Q3 Real Domestic Output, GDP

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