Aggregate Supply

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Aggregate Supply

  1. 1. 11 - 1Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowAggregate DemandandAggregate Supply11C H A P T E R
  2. 2. 11 - 2Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowDefined: The amounts of realoutput that buyerscollectively desire topurchase at each possibleprice levelAGGREGATE DEMANDAggregate Demand CurveDown Sloping Due To:•Real-Balances Effect•Interest-Rate Effect•Foreign Purchases Effect
  3. 3. 11 - 3Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowAggregateexpenditures(billionsofdollars)00PricelevelGDP1P1AE1 at P 111’P2AE2 at P 222’AE3 at P 33P33’The Aggregate DemandCan Be ConstructedDERIVATION OF THE AGGREGATE DEMAND CURVEGDP3GDP2GDP1GDP3GDP2AD
  4. 4. 11 - 4Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPricelevelReal domestic output, GDPCHANGES IN AGGREGATE DEMANDAD1AD2Aggregate DemandCan Increase
  5. 5. 11 - 5Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPricelevelReal domestic output, GDPCHANGES IN AGGREGATE DEMANDAD1AD3Aggregate DemandCan Increase…or Decrease
  6. 6. 11 - 6Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowDETERMINANTS OF AGGREGATE DEMANDChange in Consumer Spending• Consumer Wealth• Consumer Expectations• Consumer Indebtedness• TaxesChange in Investment Spending• Real Interest Rates• Expected Returns• Expected Future BusinessConditions• Technology• Degree of Excess Capacity• Business Taxes
  7. 7. 11 - 7Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowDETERMINANTS OF AGGREGATE DEMANDGovernment SpendingNet Export Spending• National Income Abroad• Exchange RatesChanges in Aggregate Demand Shiftsand the Aggregate Expenditures ModelIllustrated…
  8. 8. 11 - 8Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowAggregateexpenditures(billionsofdollars)00PricelevelGDP2AE2 at P 2P1AE1 at P 1SHIFTS IN THE AGGREGATE EXPENDITURESSCHEDULE & THE AGGREGATE DEMAND CURVEGDP1GDP2GDP1AD1AD2Increase inAggregateExpendituresIncrease inAggregateDemand
  9. 9. 11 - 9Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowHigher Price Levels Provide AnIncentive to Produce MoreAggregate Supply Has ThreeSegments or Ranges:1 - Horizontal Range2 - Intermediate (Upsloping) Range3 - Vertical RangeAGGREGATE SUPPLYDefined: The amounts of realoutput that firms will produceat each possible price level
  10. 10. 11 - 10Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowAGGREGATE SUPPLYPricelevelReal domestic output, GDPQPHorizontalRangeUpsloping orIntermediateRangeVerticalRange
  11. 11. 11 - 11Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowAGGREGATE SUPPLYPricelevelReal domestic output, GDPQP AS3AS1AS2Increase InAggregateSupplyDecrease InAggregateSupplyChanges in Aggregate Supply
  12. 12. 11 - 12Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowDETERMINANTS OF AGGREGATE SUPPLYChange in Input PricesDomestic ResourceAvailability• Land• Labor• Capital• Entrepreneurial AbilityPrices of Imported GoodsMarket Power
  13. 13. 11 - 13Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowDETERMINANTS OF AGGREGATE SUPPLYChange in ProductivityProductivity =Real OutputInputChange in Legal-InstitutionalEnvironment• Business Taxes andSubsidies• Government Regulation
  14. 14. 11 - 14Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPQP ASADEquilibrium in theIntermediate RangeQeQ1 Q2EQUILIBRIUM: REAL OUTPUTAND THE PRICE LEVELP1Pe
  15. 15. 11 - 15Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPQP ASADEquilibrium in theHorizontal RangeQeQ1 Q2EQUILIBRIUM: REAL OUTPUTAND THE PRICE LEVELPe
  16. 16. 11 - 16Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPQP ASAD2Increasing Demand in the Horizontal RangeQ1 Q2CHANGES IN EQUILIBRIUMP1AD1
  17. 17. 11 - 17Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPQP ASAD4Increasing Demand in the Intermediate RangeQ3 Q4CHANGES IN EQUILIBRIUMP3AD3P4
  18. 18. 11 - 18Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPQP ASAD6Increasing Demand in the Vertical RangeQcCHANGES IN EQUILIBRIUMP5AD5P6
  19. 19. 11 - 19Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPASAD2Inflation and the MultiplierGDP1 GDP2MULTIPLIER WITHPRICE-LEVEL CHANGESP1AD1AD3GDP3P2Full MultiplierEffect ReducedMultiplierEffect Dueto Inflation
  20. 20. 11 - 20Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowDecreasing Demand That Causes A RecessionDECREASES IN AD AND RECESSION•Wage Contracts•Morale, Effort, andProductivity•Efficiency Wages•Minimum Wage•Menu Costs•Fear of Price WarsRecession and Cyclical Unemployment
  21. 21. 11 - 21Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPASAD1Decreasing Demand That Causes A RecessionQ2 Q1DECREASES IN AD AND RECESSIONP1AD2
  22. 22. 11 - 22Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPAS1ADDecreasing Supply That Causes A RecessionQ2 Q1DECREASES IN AD AND RECESSIONP1P2AS2
  23. 23. 11 - 23Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPAS2Increasing Supply: Full-Employment andPrice-Level StabilityQ2 Q3INCREASES IN AS AND INFLATIONP1P3AS1AD1AD2P2Q1
  24. 24. 11 - 24Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowPriceLevelReal Domestic Output, GDPAS2Increasing Supply: Full-Employment andPrice-Level StabilityQ2 Q3INCREASES IN AS AND INFLATIONP1P3AS1AD1AD2P2Q1ChapterConclusions
  25. 25. ENDBACKaggregate demand-aggregate supply (AD-AS) modelaggregate demandreal-balances effectinterest-rate effectforeign purchases effectdeterminants of aggregatedemandaggregate supplyhorizontal range (of AScurve)intermediate range (of AScurve)vertical range (of AS curve)determinants of aggregatesupplyproductivityequilibrium price levelequilibrium real outputefficiency wagesmenu costsCopyright McGraw-Hill/Irwin, 2002
  26. 26. 11 - 26Copyright McGraw-Hill/Irwin 2002Aggregate DemandDerivation of the AD CurveChanges in ADDeterminants of ADShifts in AE Schedule and CurveAggregate SupplyEquilibrium Real Output & Price LevelChanges in EquilibriumMultiplier & Price ChangesChanges in AD & ASKey TermsPreviousSlideNextSlideEndShowComingnext... FISCALPOLICYChapter12

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