The document discusses aggregate supply and demand. It defines aggregate demand as the total output desired at different price levels, and shows the downward sloping aggregate demand curve. It then discusses factors that can cause aggregate demand to increase or decrease like consumer spending, investment, government spending, and net exports. Aggregate supply is defined as the total output firms will produce at different price levels. It shows three phases of the aggregate supply curve and how productivity, input prices, and other factors can cause shifts in the curve. The document ends by discussing how equilibrium between aggregate supply and demand can change with price levels and real output.

1. Aggregate Supply and Demand

2. Defined: Amounts of Real Output Buyers Collectively Desire At Each Possible Price Level AGGREGATE DEMAND Aggregate Demand Curve Down Sloping Due To: Real-Balances Effect Interest-Rate Effect Foreign Purchases Effect Graphically…

3. Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 2 Aggregate Demand Can Increase

4. Price level Real domestic output, GDP CHANGES IN AGGREGATE DEMAND AD 1 AD 3 Aggregate Demand Can Increase … or Decrease

5. 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

6. DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending National Income Abroad Exchange Rates

7. How to increase productivity

8. 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

9. 3 Reasons For Downward Sloping AD Curve Real Money-balances E ffect – economy’s monetary wealth. If we buy a fixed bundle of goods & services (food/clothing/shelter), at lower prices, it now takes less money. Our accumulated savings balances [401k, CDs, bonds] will purchase more. AD Interest Rate Effect – lower interest rates increase investment and consumption. Foreign Purchase Effect – with lower U.S. prices, both Americans and foreigners buy more American goods. Market Basket PL 1 PL 2

10. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Horizontal Range Upsloping or Intermediate Range Vertical Range

11. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P AS 3 AS 1 AS 2 Increase In Aggregate Supply Decrease In Aggregate Supply Changes in Aggregate Supply

12. DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic Resource Availability Land Labor Capital Entrepreneurial Ability Prices of Imported Goods Market Power

13. DETERMINANTS OF AGGREGATE SUPPLY Change in Productivity Change in Legal-Institutional Environment Business Taxes and Subsidies Government Regulation Productivity = Real Output Input

14. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Long Run AS LR Long-run Aggregate Supply Q f Full-Employment

15. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Short Run AS Aggregate Supply Short-run Q f Full- Employment

16. Price Level Real Domestic Output, GDP Q P AS AD 510 502 514 EQUILIBRIUM AND CHANGES IN EQUILIBRIUM 92 100 a b Equilibrium Real Output

17. Price Level Real Domestic Output, GDP Q P AS AD 1 INCREASES IN AD: DEMAND-PULL INFLATION P 2 P 1 AD 2 Q f Q 1 Q 2

18. Price Level Real Domestic Output, GDP Q P AS AD 1 DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT P 1 AD 2 Q f Q 1 a c b

19. Wage Contracts Morale, Effort, and Productivity Efficiency Wages Minimum Wage Menu Costs Fear of Price Wars Why prices are downwardly inflexible

20. Price Level Real Domestic Output, GDP Q P AS 1 AD 1 DECREASES IN AS: COST-PUSH INFLATION P 2 Q f Q 1 a b AS 2 P 1

21. Price Level Real Domestic Output, GDP Q P AS 1 AD 1 INCREASES IN AS: FULL EMPLOYMENT P 1 Q 2 Q 1 a b AS 2 P 2 … With Price-Level Stability AD 2 P 3 Q 3 Any Questions?

22. Coming soon... FISCAL POLICY Chapter 12