Chapter 30

Aggregate Demand

and Aggregate Supply

Chapter 30

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30-2

Aggregate Demand

Real GDP desired at each price level

Inverse relationship

Real balances effect

Interest effect

Foreign purchases effect

LO1

30-3

Aggregate Demand

Real domestic output, GDP

Pri

ce

le

ve

l

AD

0

LO1

30-4

Changes in Aggregate Demand

Determinants of aggregate demand

Shift factors affecting C, I, G, Xn 2 components involved

Change in one of the determinants

Multiplier effect

LO2

30-5

Changes in Aggregate Demand


Pri

ce level

AD1AD3

AD2

0

LO2

30-6

Consumer Spending

Consumer wealth

Household borrowing

Consumer expectations

Personal taxes

LO2

30-7

Investment Spending

Real interest rates

Expected returns

Expectations about future business conditions

Technology

Degree of excess capacity

Business taxes

LO2

30-8

Government Spending

Government spending increases

Aggregate demand increases (as long as interest rates and tax rates do not change)

More transportation projects

Government spending decreases

Aggregate demand decreases

Less military spending

LO2

30-9

Net Export Spending

National income abroad

Exchange rates

Dollar depreciation

Dollar appreciation

LO2

30-10

Aggregate Supply

Total real output produced at each price level

Relationship depends on time horizon

Immediate short run

Short run

Long run

LO3

30-11

AS: Immediate Short Run


Pri

ce level

ASISR

Qf

Immediate-short-run

aggregate supply

P1

0

LO3

30-12

Aggregate Supply: Short Run


Pri

ce level

0Qf

AS

Aggregate supply

(short run)

LO3

30-13

Aggregate Supply: Long Run


Pri

ce level

ASLR

Qf0

Long-run

aggregate

supply

LO3

30-14

Changes in Aggregate Supply

Determinants of aggregate supply

Shift factors

Collectively position the AS curve

Changes raise or lower per-unit production costs

LO4

30-15

Changes in Aggregate Supply


Pri

ce level

AS1AS3

AS2

0

LO4

30-16

Input Prices

Domestic resource prices

Labor

Capital

Land

Prices of imported resources

Imported oil

Exchange rates

LO4

30-17

Productivity

Real output per unit of input

Increases in productivity reduce costs

Decreases in productivity increase costs

Per-unit production cost =total input cost

total output

Productivity =total output

total inputs

LO4

30-18

Legal-Institutional Environment

Legal changes alter per-unit costs of output

Taxes and subsidies

Extent of government regulation

LO4

30-19

Equilibrium

Real domestic output, GDP(billions of dollars)

Pri

ce level

(in

dex n

um

bers

)

100

92

502 510 514

ab

AD

AS

Real OutputDemanded

(Billions)Price Level

(Index Number)

Real OutputSupplied(Billions)

$506 108 $513

508 104 512

510 100 510

512 96 507

514 92 502

0

LO5

30-20

Changes in Equilibrium


Pri

ce level

AD1

AS

P1

P2

Q2Q1Qf

AD2

0

LO6

30-21

Decreases in AD: Recession


Pri

ce level

AD1

AS

P1

P2

Q1 Q2 Qf

AD2

c

ab

0

LO6

30-22

Decreases in AD: Recession

Prices are downwardly inflexible

Fear of price wars

Menu costs

Wage contracts

Efficiency wages

Minimum wage law

LO6

30-23

Decreases in AS: Cost-Push Inflation


Pri

ce level

AD

AS1

P1

P2

Q1 Qf

AS2

a

b

0

LO6

30-24

Increases in AS: Full-Employment


Pri

ce level

AD1

AS2

P1

P2

Q2Q1

AS1

b

AD2

c

P3

Q3

a

0

LO6

30-25

Stimulus and the Great Recession

Housing collapse triggers bank failures which leads to recession

Federal Reserve intervenes

Lowers short-term interest rates

Federal Government begins largest peacetime program of spending

30-26

Stimulus and the Great Recession

GDP growth has been disappointing

High debt load due to low interest rates

High rate of savings

Unequal impact

Price increases rather than output gains

Documents

Chapter 30