Aggregate demand

1. Aggregate Demand and Supply
Dr. Vaseem Akram
Assistant Professor
Phone No:6398012849
Session No:11
Email Id: vakram@iimj.ac.in

2. Aggregate Demand (AD)
Aggregate Supply (AS)
Equilibrium (AD=AS)
Agenda

3. Learning Objective
• To determine the aggregate demand and supply through price
adjustment mechanisms.

4. Aggregate Demand (AD)

5. Aggregate Demand (AD)
or
Aggregate demand is the total demand of goods
and services produced in a country in a given year
at given prices.
It is defined as the overall quantity of goods and
services that households, firms and government
want buy at given prices level.
Total amount of goods and services consumed
by consumers, business investment
expenditures and government purchases.
AD
Closed
Economy
Consumer
(C)
Business
investmen
t (I)
Government
(G)

6. Aggregate Demand Function and Curve
Where C=Consumption; I=Investment;
G=Government spending; NX=Net exports

7. Why AD curve is downward sloping?
Consumption effect
Nominal of
money value is
not fixed that you
hold
(1)
Real value of
money is fixed
(2)
Change in
prices
(3)
Change
consumption
(4)
Change
in Demand
of Goods &
Services
(5)

8. Consumption effect:

9. /

10. Consumer/Households/Private Consumption
What will happen with AD if there is an increase in consumption (C)?

11. Price and Investment:
Interest rate effect
Fall in
Price
The Less
money
households
need to hold
Households
lends some
part of it
Lower the
rate of
interest
Cost of
borrowing
will decline
for firms
Encourage
the firms’
investment
Leads to
greater
investment
spending

12. Price and NX:
Exchange rate effect:
Fall in
Price
Lower
interest
rate
Some
investors may
invest in
abroad
Deprecation
Exchange
rate
Export will be
cheaper &
imports will
be costlier
Encourage
the firms’
investment
Leads to
greater
investment
spending

13. Summary of why AD curve is downward sloping
09/30/2020
Consumer are wealthier, that stimulates the demands of Goods
and services.
Interest fall leads to higher demand for investment.
Exchange rate depreciation raise the demand of net exports.

14. Why aggregate demand shift?
Shift from consumption and tax policy
More Saving
Lower
consumption
AD curve shift to
left

15. Investment
Encourages the purchase
of goods and services
AD curve shift to right
Shift from investment and tax policy

16. Government spending
Encourages the purchase
of goods and services
AD curve shift to right
Shift from government spending

17. Any event that changes
the net exports for given
price level
Recession
AD curve shift to left
Shift from Net Exports

18. Aggregate Supply

19. Aggregate Supply and Supply Curve
Aggrgeate supply:
Total qunaity of goods and services that firms produce
and sell at any given price in a given year.
Aggregate supply curve:
It depends upon the time horizon.

20. Short-run and long-run in macroeconomics
• A period in which one factor of production can not change.
• For e.g. if wage stuck at certain level, we would be still in the
short run.
Short-run in
Macroeconomic
s
• Long-run means long enough for all prices to fully
adjust to any kind of change.
Long-run in
Macroeconomic
s

22. Why aggregate supply (AS) curve upward
sloping in short-run?
• Do all prices change in the
short-run?
Price
stickiness
• Do wages change easily?
• E.g. Employment contracts, Costs
of hiring and firing workers
Wage
stickiness
• Suppliers may mislead by
aggregate price.
Misperception

23. Shift in aggregate supply (AS) curve in short-
run (SR)
• SRAS curve shift to left due
to declined in goods and
services
Expected
price
• SRAS shift to right
Subsidies
• SRAS Shift to right
Productivity

24. • AS shift to right/left
Input
price
s
• AS shift to right
Taxes

25. • Lower unemployment
High
Inflation
• High unemployment
Lower
inflation
Trade off between inflation and unemployment in short-run

26. Why aggregate supply is vertical in long-run?
A curve that shows the relationship
between price level and real GDP that
would be supplied if all prices,
including nominal wages, were fully
flexible; price can change along the
LRAS, but output cannot because that
output reflects the full employment
output.
Long run production function
Y = A F(L, K, T, N).

27. Shift in aggregate supply (AS) curve in long-run
• LRAS shift to right/left
Labour
• LRAS shift to right/left
Capital
• LRAS shift to right/left
Natural resources
• LRAS shift to right/left
Technological knowledge