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08 Chap

This document summarizes key concepts relating to aggregate demand, aggregate supply, and inflation. It introduces aggregate demand and supply curves and explains how they interact. Shifts in aggregate demand and supply are caused by changes in variables like taxes, productivity, and government spending. Inflation can be caused by either demand-pull factors that increase aggregate demand, or cost-push factors that decrease aggregate supply. Supply-side economics aims to influence the economy through policies that impact aggregate supply.

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17 views

08 Chap

This document summarizes key concepts relating to aggregate demand, aggregate supply, and inflation. It introduces aggregate demand and supply curves and explains how they interact. Shifts in aggregate demand and supply are caused by changes in variables like taxes, productivity, and government spending. Inflation can be caused by either demand-pull factors that increase aggregate demand, or cost-push factors that decrease aggregate supply. Supply-side economics aims to influence the economy through policies that impact aggregate supply.

Uploaded by

mayrahrajpoot
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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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

McGraw-Hill/Irwin © 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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


Figure 1 Aggregate Demand
PI

AD

RGDP
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


Figure 2 The Aggregate
Supply Curve
PI
Classical
Range

Intermediate
Range

Keynesian Range

RGDP
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
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.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


Determinants of AD
Variable GDP Component Effect of an Effect of a
Affected increase on decrease on
C,I,G,X AD AD
Taxes C,I Decrease so Increase so
AD <= AD =>
Interest Rates C,I Decrease so Increase so
AD <= AD =>
Confidence C,I Increase so Decrease so
AD => AD <=
Strength of X (exports- Decrease so Increase so
the Dollar imports) AD <= AD =>
Government G Increase so Decrease so
Spending AD => AD <=
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Figure 3 AD Increases

PI AS

PI’

PI*

AD’

AD

RGDP* RGDP’ RGDP


McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Figure 4 AD Decreases

PI AS

PI*

PI’

AD

AD’

RGDP’ RGDP*
RGDP
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Variables that Shift AS
• Input Prices
• Productivity
• Government Regulation

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


Determinants of AS
Variable Effect of an Effect of an
Increase on AS Decrease on AS

Input Prices Decrease so Increase so


AS AS
Productivity Increase so Decrease so
AS AS
Government Decrease so Increase so
Regulation AS AS

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


Figure 5 Increase in AS
PI
AS

AS’

PI*

PI’
AD

RGDP* RGDP’ RGDP


McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Figure 6 Decrease in AS
PI AS’

AS

PI’

PI*

AD

RGDP’ RGDP*
RGDP
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.


Supply-Side Economics
• Supply-side economics: government
policy intended to influence the
economy via aggregate supply by
lowering input costs and reducing
regulation

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.

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