Spending and Total Expenditures
 Aggregate Demand
– The total of all planned expenditures
in the economy
 Aggregate Supply
– The total of all planned production
in the economy
Slide 10-1
Spending and Total Expenditures
 Questions
– What determines the total amount that
individuals, governments, firms, and
foreigners want to spend?
– What determines the equilibrium
price level?
Slide 10-2
The Aggregate Demand Curve
 Aggregate Demand Curve
– A curve showing planned purchase rates
for all goods and services in the economy
at various price levels, all other things
held constant
Aggregate demand = C + I + G + X
Slide 10-3
The Aggregate Demand Curve
As the price level
rises, real GDP
demand declines
Price Level
140
120
A
100
AD
0
6
7
8
9
10
Real GDP per Year
($ trillions)
11
12
Slide 10-4
The Aggregate Demand Curve
Price Level
140
B
120
A
100
AD
0
6
7
8
9
10
Real GDP per Year
($ trillions)
11
12
Slide 10-5
The Aggregate Demand Curve
C
Price Level
140
B
120
A
100
AD
0
Figure 10-4
6
7
8
9
10
Real GDP per Year
($ trillions)
11
12
Slide 10-6
The Aggregate Demand Curve
 What happens when the price
level rises?
– The Real-Balance Effect (wealth effect)
– The Interest Rate Effect
– The Open Economy Effect
Slide 10-7
The Aggregate Demand Curve
 The Real-Balance Effect
– The change in the real value of money
balances when the price level changes
Slide 10-8
The Aggregate Demand Curve
 The Interest Rate Effect
– Higher price levels indirectly increase
the interest rate.
Slide 10-9
The Aggregate Demand Curve
 The Open Economy Effect
– Higher price levels result in foreigners’
desiring to buy fewer American-made
goods while Americans desire more
foreign-made goods (i.e., net exports fall).
Slide 10-10
Aggregate Demand versus
Demand for a Single Good
 When the aggregate demand curve is
derived, we are looking at the entire
circular flow of income and product.
 When a demand curve is derived, we
are looking at a single product in one
market only.
Slide 10-11
Shifts in the Aggregate
Demand Curve
 Any non-price-level change that
increases aggregate spending (on
domestic goods) shifts AD to the right.
 Any non-price-level change that
decreases aggregate spending (on
domestic goods) shifts AD to the left.
Slide 10-12
Shifts in the Aggregate
Demand Curve
 Any non-price-level change that
increases aggregate spending (on
domestic goods) shifts AD to the right.
 Any non-price-level change that
decreases aggregate spending (on
domestic goods) shifts AD to the left.
Slide 10-13
Factors Increasing
Aggregate Demand
 A drop in the foreign exchange value of the dollar
 Increased security about jobs and future income
 Improvements in economic conditions
in other countries
 A reduction in real interest rates (nominal interest
rates corrected for inflation) not due to price
level changes
 Tax decreases
 An increase in the amount of money in circulation
Slide 10-14
GDP Deflator
Shifts in the Aggregate
Demand Curve
120
90
AD
0
1
2
3
4
5
Real GDP per Year
($ trillions)
6
7
Slide 10-15
GDP Deflator
Shifts in the Aggregate
Demand Curve
120
90
AD
0
1
2
3
4
5
Real GDP per Year
($ trillions)
6
7
Slide 10-16
Shifts in the Aggregate
Demand Curve
GDP Deflator
Increase in aggregate demand
120
90
AD
0
1
2
3
4
5
Real GDP per Year
($ trillions)
6
AD1
7
Slide 10-17
Factors Decreasing
Aggregate Demand
 A rise in the foreign exchange value of the dollar
 Decreased security about jobs and future income
 Declines in economic conditions in other countries
 A rise in real interest rates (nominal interest rates
corrected for inflation) not due to price
level changes
 Tax increases
 A decrease in the amount of money in circulation
Slide 10-18
GDP Deflator
Shifts in the Aggregate
Demand Curve
120
90
AD
0
1
2
3
4
5
Real GDP per Year
($ trillions)
6
7
Slide 10-19
GDP Deflator
Shifts in the Aggregate
Demand Curve
120
90
AD
0
1
2
3
4
5
Real GDP per Year
($ trillions)
6
7
Slide 10-20
Shifts in the Aggregate
Demand Curve
GDP Deflator
Decrease in aggregate demand
120
90
0
1
2
3
4
AD1
AD
5
6
Real GDP per Year
($ trillions)
7
Slide 10-21
The Aggregate Supply Curve
 The Long-Run Aggregate Supply Curve
– Real output at full employment
– A vertical line representing real output
based on full information and after full
adjustment has occurred
Slide 10-22
Long-Run Equilibrium
and the Price Level
Figure 10-5
Slide 10-23
Long-Run Equilibrium
and the Price Level
 Long-run equilibrium occurs at the
intersection of the LRAS curve
and the AD curve
– Equilibrium price level is determined
– Planned real expenditures for the economy
are equal to total planned production along
the economy’s trends growth path
Slide 10-24
The Effects of Economic Growth
on the Price Level
Figure 10-6, Panel (a)
Slide 10-25
The Effects of Economic Growth
on the Price Level
Figure 10-6, Panel (b)
Slide 10-26
The Effects of Economic Growth
on the Price Level
 Secular Deflation
– An increase in LRAS will, ceteris paribus,
result in a decrease in the price level.
 Avoiding Secular Deflation
– If the AD curve shifts outward by the
same amount as the LRAS curve,
the price level remains constant.
– The AD curve can be shifted outward
by increasing the money supply.
Slide 10-27
Inflation Rates
in the United States
Figure 10-7
Source: Economic Report of the President;
Economic Indicators, various issues
Slide 10-28
Causes of Inflation:
Supply-Side Inflation
• When LRAS1 shifts to
LRAS2, the price level
rises from 120 to 140
• Inflation is caused by
a decrease in LRAS.
Figure 10-8, Panel (a)
Slide 10-29
Causes of Inflation:
Demand-Side Inflation
An increase in AD from AD1
to AD2 causes the price level
to rise from 120 to 140. An
increase in AD causes
inflation.
Figure 10-8, Panel (b)
Slide 10-30
Causes of Inflation:
Economic Growth and Inflation
Figure 10-9
Source: Economic Report of the President;
Economic Indicators, various issues
Slide 10-31