Lecture 4 (ad&as)

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Lecture 4 (ad&as)

  1. 1. Lesson 4 . AGGREGATE DEMAND AND AGGREGATE SUPPLY Aggregate demand: Meaning; shape and position; effect of policy variables; determinants. Aggregate supply: Meaning; shape and position in short and long run; effect of policy variables; determinants
  2. 2. • Defined: The amounts of real output that buyers collectively desire to purchase at each possible price level • Aggregate Demand Curve • Down Sloping Due To: • Real-Balances Effect • Interest-Rate Effect • Foreign Purchases Effect
  3. 3. The Aggregate Demand Curve GDP Pricelevel AD1
  4. 4. DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending © • Consumer Wealth • Consumer Expectations • Consumer Indebtedness • Taxes • Real Interest Rates • Expected Returns • Expected Future Business Conditions • Technology • Degree of Excess Capacity • Business Taxes Change in Investment Spending (I)
  5. 5. Government Spending (G) Net Export Spending (X-M) • National Income Abroad • Exchange Rates
  6. 6. AGGREGATE SUPPLY Defined: The amounts of real output that firms will produce at each possible price level Higher Price Levels Provide An Incentive to Produce More Aggregate Supply Has Three Segments or Ranges: 1 - Horizontal Range 2 - Intermediate (Upsloping) Range 3 - Vertical Range
  7. 7. AGGREGATE SUPPLY CURVE Upsloping or Intermediate Range Vertical Range Horizontal Range Real domestic output, GDP Pricelevel AS Q P
  8. 8. DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic Resource Availability • Land • Labor • Capital • Entrepreneurial Ability Prices of Imported Goods Market Power
  9. 9. Change in Productivity Productivity = Real Output Input Change in Legal-Institutional Environment • Business Taxes and Subsidies • Government Regulation

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