1. Aggregate Demand and Aggregate Supply Chapter 31

5. (a) Real GDP 1965 1970 1975 1980 1985 1990 1995 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 $7,000 A Look At Short-Run Economic Fluctuations Recessions Billions of 1992 Dollars Real GDP

7. (b) Investment Spending Billions of 1992 Dollars 300 400 500 600 700 800 900 1,000 $1,100 1965 1970 1975 1980 1985 1990 1995 A Look At Short-Run Economic Fluctuations Recessions Investment spending

9. (c) Unemployment Rate 0 2 4 6 8 10 12 1965 1970 1975 1980 1985 1990 1995 A Look At Short-Run Economic Fluctuations Recessions Unemployment rate Percent of Labor Force

12. The Basic Model of Economic Fluctuations Economist use the model of aggregate demand and aggregate supply to explain short-run fluctuations in economic activity around its long-run trend.

15. Aggregate Demand and Aggregate Supply... 0 Equilibrium output Quantity of Output Price Level Equilibrium price level Aggregate supply Aggregate demand

17. The Aggregate-Demand Curve... 0 Quantity of Output Price Level Aggregate demand P 1 Y 1 Y 2 P 2 2. …increases the quantity of goods and services demanded. 1. A decrease in the price level...

24. Shifts in the Aggregate Demand Curve... 0 P 1 Y 1 Quantity of Output Price Level Aggregate demand, D 1 D 2 Y 2

27. The Long-Run Aggregate- Supply Curve... Price Level 0 Quantity of Output Natural rate of output Long-run aggregate supply P 1 P 2 2. …does not affect the quantity of goods and services supplied in the long run. 1. A change in the price level…

31. Long-Run Growth and Inflation... Price Level 0 P 1980 Y 1980 AD 1980 LRAS 1980 1. In the long-run, technological progress shifts long-run aggregate supply... LRAS 2000 LRAS 1990 Quantity of Output P 2000 P 1990 2. …and growth in the money supply shifts aggregate-demand... AD 2000 AD 1990 4. …and ongoing inflation. Y 1990 Y 2000 3. …leading to growth in output...

32. Long-Run Growth and Inflation Short-run fluctuations in output and price level should be viewed as deviations from the continuing long-run trends.

34. The Short-Run Aggregate Supply Curve... Price Level 0 Quantity of Output Short-run aggregate supply Y 1 P 1 Y 2 2. reduces the quantity of goods and services supplied in the short run. P 2 1. A decrease in the price level

41. The Long-Run Equilibrium Quantity of Output Price Level 0 Short-run aggregate supply Long-run aggregate supply Aggregate demand A Equilibrium price Natural rate of output

42. A Contraction in Aggregate Demand... Price Level 0 A P 1 Y 1 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 1. A decrease in aggregate demand… AD 2 Quantity of Output Short-run aggregate supply, AS 1 Long-run aggregate supply Aggregate demand, AD 1 B P 2 Y 2 2. …causes output to fall in the short run… AS 2 C P 3 3. …but over time, the short-run aggregate-supply curve shifts… 4. …and output returns to its natural rate.

45. An Adverse Shift in Aggregate Supply... Long-run aggregate supply Short-run aggregate supply, AS 1 0 Aggregate demand A Y 1 P 1 1. An adverse shift in the short-run aggregate-supply curve… AS 2 Quantity of Output Price Level 3. …and the price level to rise. P 2 2. …causes output to fall… B Y 2

48. Accommodating an Adverse Shift in Aggregate Supply... 0 Short-run aggregate supply, AS 1 Aggregate demand, AD 1 Long-run aggregate supply A P 1 AS 2 1. When short-run aggregate supply falls… Quantity of Output Natural rate of output Price Level P 2 P 3 3....which causes the price level to rise 4. …but keeps output at its natural rate. C 2. …policymakers can accommodate the shift by expanding aggregate demand… AD 2

50. Summary & Graphical Review

51. A Look At Short-Run Economic Fluctuations Recessions (a) Real GDP Billions of 1992 Dollars 1965 1970 1975 1980 1985 1990 1995 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 $7,000 Real GDP

52. A Look At Short-Run Economic Fluctuations Recessions (b) Investment Spending Billions of 1992 Dollars 300 400 500 600 700 800 900 1,000 $1,100 Investment spending 1965 1970 1975 1980 1985 1990 1995

53. A Look At Short-Run Economic Fluctuations Recessions (c) Unemployment Rate Unemployment rate 0 2 4 6 8 10 12 1965 1970 1975 1980 1985 1990 1995 Percent of Labor Force

54. Aggregate Demand and Aggregate Supply... Equilibrium output Quantity of Output Price Level 0 Equilibrium price level Aggregate supply Aggregate demand

55. The Aggregate-Demand Curve... Quantity of Output Price Level 0 Aggregate demand P 1 Y 1 Y 2 P 2 2. …increases the quantity of goods and services demanded. 1. A decrease in the price level...

56. Shifts in the Aggregate Demand Curve... Quantity of Output Price Level 0 Aggregate demand, D 1 P 1 Y 1 D 2 Y 2

57. The Long-Run Aggregate- Supply Curve... Quantity of Output Natural rate of output Price Level 0 Long-run aggregate supply P 1 P 2 2. …does not affect the quantity of goods and services supplied in the long run. 1. A change in the price level…

58. Long-Run Growth and Inflation... 1. In the long-run, technological progress shifts long-run aggregate supply... LRAS 2000 LRAS 1990 Quantity of Output Price Level 0 P 1980 Y 1980 AD 1980 P 2000 P 1990 LRAS 1980 2. …and growth in the money supply shifts aggregate-demand... AD 2000 AD 1990 4. …and ongoing inflation. Y 1990 Y 2000 3. …leading to growth in output...

59. The Short-Run Aggregate Supply Curve... Quantity of Output Price Level 0 Short-run aggregate supply Y 1 P 1 Y 2 2. reduces the quantity of goods and services supplied in the short run. P 2 1. A decrease in the price level

60. The Long-Run Equilibrium Quantity of Output Price Level 0 Short-run aggregate supply Long-run aggregate supply Aggregate demand A Equilibrium price Natural rate of output

61. A Contraction in Aggregate Demand... Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 1. A decrease in aggregate demand… AD 2 Quantity of Output Price Level 0 Short-run aggregate supply, AS 1 Long-run aggregate supply Aggregate demand, AD 1 A P 1 Y 1 B P 2 Y 2 2. …causes output to fall in the short run… AS 2 C P 3 3. …but over time, the short-run aggregate-supply curve shifts… 4. …and output returns to its natural rate.

62. An Adverse Shift in Aggregate Supply... 1. An adverse shift in the short-run aggregate-supply curve… AS 2 Long-run aggregate supply Short-run aggregate supply, AS 1 Quantity of Output Price Level 0 Aggregate demand A Y 1 P 1 3. …and the price level to rise. P 2 2. …causes output to fall… B Y 2

63. Accommodating an Adverse Shift in Aggregate Supply... AS 2 1. When short-run aggregate supply falls… Quantity of Output Natural rate of output Price Level 0 Short-run aggregate supply, AS 1 Aggregate demand, AD 1 Long-run aggregate supply A P 1 P 2 P 3 3....which causes the price level to rise 4. …but keeps output at its natural rate. C 2. …policymakers can accommodate the shift by expanding aggregate demand… AD 2