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Aggregate Supply
- 1. 11 - 1 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Aggregate Demand and Aggregate Supply 11C H A P T E R
- 2. 11 - 2 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Defined: The amounts of real output that buyers collectively desire to purchase at each possible price level AGGREGATE DEMAND Aggregate Demand Curve Down Sloping Due To: •Real-Balances Effect •Interest-Rate Effect •Foreign Purchases Effect
- 3. 11 - 3 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Aggregateexpenditures (billionsofdollars) 0 0 Pricelevel GDP1 P1 AE1 at P 1 1 1’ P2 AE2 at P 2 2 2’ AE3 at P 3 3 P3 3’ The Aggregate Demand Can Be Constructed DERIVATION OF THE AGGREGATE DEMAND CURVE GDP3GDP2 GDP1GDP3GDP2 AD
- 4. 11 - 4 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Pricelevel Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD1 AD2 Aggregate Demand Can Increase
- 5. 11 - 5 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Pricelevel Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD1 AD3 Aggregate Demand Can Increase …or Decrease
- 6. 11 - 6 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending • Consumer Wealth • Consumer Expectations • Consumer Indebtedness • Taxes Change in Investment Spending • Real Interest Rates • Expected Returns • Expected Future Business Conditions • Technology • Degree of Excess Capacity • Business Taxes
- 7. 11 - 7 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending • National Income Abroad • Exchange Rates Changes in Aggregate Demand Shifts and the Aggregate Expenditures Model Illustrated…
- 8. 11 - 8 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Aggregateexpenditures (billionsofdollars) 0 0 Pricelevel GDP2 AE2 at P 2 P1 AE1 at P 1 SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE GDP1 GDP2GDP1 AD1 AD2 Increase in Aggregate Expenditures Increase in Aggregate Demand
- 9. 11 - 9 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show 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 AGGREGATE SUPPLY Defined: The amounts of real output that firms will produce at each possible price level
- 10. 11 - 10 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show AGGREGATE SUPPLY Pricelevel Real domestic output, GDP Q P Horizontal Range Upsloping or Intermediate Range Vertical Range
- 11. 11 - 11 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show AGGREGATE SUPPLY Pricelevel Real domestic output, GDP Q P AS3AS1AS2 Increase In Aggregate Supply Decrease In Aggregate Supply Changes in Aggregate Supply
- 12. 11 - 12 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic Resource Availability • Land • Labor • Capital • Entrepreneurial Ability Prices of Imported Goods Market Power
- 13. 11 - 13 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show DETERMINANTS OF AGGREGATE SUPPLY Change in Productivity Productivity = Real Output Input Change in Legal-Institutional Environment • Business Taxes and Subsidies • Government Regulation
- 14. 11 - 14 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP Q P AS AD Equilibrium in the Intermediate Range QeQ1 Q2 EQUILIBRIUM: REAL OUTPUT AND THE PRICE LEVEL P1 Pe
- 15. 11 - 15 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP Q P AS AD Equilibrium in the Horizontal Range QeQ1 Q2 EQUILIBRIUM: REAL OUTPUT AND THE PRICE LEVEL Pe
- 16. 11 - 16 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP Q P AS AD2 Increasing Demand in the Horizontal Range Q1 Q2 CHANGES IN EQUILIBRIUM P1 AD1
- 17. 11 - 17 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP Q P AS AD4 Increasing Demand in the Intermediate Range Q3 Q4 CHANGES IN EQUILIBRIUM P3 AD3 P4
- 18. 11 - 18 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP Q P AS AD6 Increasing Demand in the Vertical Range Qc CHANGES IN EQUILIBRIUM P5 AD5 P6
- 19. 11 - 19 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP AS AD2 Inflation and the Multiplier GDP1 GDP2 MULTIPLIER WITH PRICE-LEVEL CHANGES P1 AD1 AD3 GDP3 P2 Full Multiplier Effect Reduced Multiplier Effect Due to Inflation
- 20. 11 - 20 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Decreasing Demand That Causes A Recession DECREASES IN AD AND RECESSION •Wage Contracts •Morale, Effort, and Productivity •Efficiency Wages •Minimum Wage •Menu Costs •Fear of Price Wars Recession and Cyclical Unemployment
- 21. 11 - 21 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP AS AD1 Decreasing Demand That Causes A Recession Q2 Q1 DECREASES IN AD AND RECESSION P1 AD2
- 22. 11 - 22 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP AS1 AD Decreasing Supply That Causes A Recession Q2 Q1 DECREASES IN AD AND RECESSION P1 P2 AS2
- 23. 11 - 23 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP AS2 Increasing Supply: Full-Employment and Price-Level Stability Q2 Q3 INCREASES IN AS AND INFLATION P1 P3 AS1 AD1 AD2 P2 Q1
- 24. 11 - 24 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show PriceLevel Real Domestic Output, GDP AS2 Increasing Supply: Full-Employment and Price-Level Stability Q2 Q3 INCREASES IN AS AND INFLATION P1 P3 AS1 AD1 AD2 P2 Q1 Chapter Conclusions
- 25. ENDBACK aggregate demand- aggregate supply(AD- AS) model aggregate demand real-balances effect interest-rate effect foreign purchases effect determinants of aggregate demand aggregate supply horizontal range (of AS curve) intermediate range (of AS curve) vertical range (of AS curve) determinants of aggregate supply productivity equilibrium price level equilibrium real output efficiency wages menu costs Copyright McGraw-Hill/Irwin, 2002
- 26. 11 - 26 CopyrightMcGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide Next Slide End Show Coming next... FISCAL POLICY Chapter 12