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Aggregate
Demand and
Supply
Introducing Aggregate Expenditure
Introducing Aggregate Demand and Aggregate Supply
Aggregate Demand
Aggregate Supply
The Aggregate Demand-Supply Model
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Aggregate Demand and Supply > Introducing Aggregate Expenditure
Introducing Aggregate Expenditure
• Defining Aggregate Expenditure: Components and Comparison to
GDP
• Aggregate Expenditure at Economic Equilibrium
• Graphing Equilibrium
• The Multiplier Effect
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Aggregate Demand and Supply > Introducing Aggregate Demand and Aggregate Supply
Introducing Aggregate Demand and Aggregate Supply
• Explaining Fluctuations in Output
• Classical Theory
• Keynesian Theory
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Aggregate Demand and Supply > Aggregate Demand
Aggregate Demand
• Introducing Aggregate Demand
• The Slope of the Aggregate Demand Curve
• Reasons for and Consequences of Shifts in the Aggregate Demand
Curve
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Aggregate Demand and Supply > Aggregate Supply
Aggregate Supply
• Introducing Aggregate Supply
• The Slope of the Short-Run Aggregate Supply Curve
• The Slope of the Long-Run Aggregate Supply Curve
• Moving from Short-Run to Long-Run
• Reasons for and Consequences of Shifts in the Short-Run Aggregate
Supply Curve
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Aggregate Demand and Supply > The Aggregate Demand-Supply Model
The Aggregate Demand-Supply Model
• Macroeconomic Equilibrium
• Reasons for and Consequences of Shift in Aggregate Demand
• Reasons for and Consequences of Shift in Aggregate Supply
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Appendix
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Aggregate Demand and Supply
Key terms
• aggregate A mass, assemblage, or sum of particulars; something consisting of elements but considered as a whole.
• aggregate A mass, assemblage, or sum of particulars; something consisting of elements but considered as a whole.
• aggregate A mass, assemblage, or sum of particulars; something consisting of elements but considered as a whole.
• aggregate A mass, assemblage, or sum of particulars; something consisting of elements but considered as a whole.
• aggregate demand The the total demand for final goods and services in the economy at a given time and price level.
• aggregate demand In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in the
economy at a given time and price level.
• aggregate demand The the total demand for final goods and services in the economy at a given time and price level.
• aggregate supply The total supply of goods and services that firms in a national economy plan on selling during a specific time
period.
• capital Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and
office buildings (structures).
• demand The desire to purchase goods and services.
• economic output The productivity of a country or region measured by the value of goods and services produced.
• equilibrium The condition of a system in which competing influences are balanced, resulting in no net change.
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Aggregate Demand and Supply
• equilibrium The condition of a system in which competing influences are balanced, resulting in no net change.
• exogenous Received from outside a group
• expenditure Act of expending or paying out.
• expenditure Act of expending or paying out.
• expenditure The act of incurring a cost or pay out.
• factor of production A resource employed to produce goods and services, such as labor, land, and capital.
• fiscal multiplier The ratio of a change in national income to the change in government spending that causes it.
• gross domestic product A measure of the economic production of a particular territory in financial capital terms over a specific
time period.
• Keynesian Economics A school of thought that is characterized by a belief in active government intervention in an economy
and the use of monetary policy to promote growth and stability.
• liquidity trap Injections of cash into the private banking system by a central bank fail to lower interest rates and stimulate
economic growth.
• long-run The conceptual time period in which there are no fixed factors of production.
• multiplier effect A factor of proportionality that measures how much an endogenous variable changes in response to a change
in some exogenous variable.
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Aggregate Demand and Supply
• nominal Without adjustment to remove the effects of inflation (in contrast to real).
• output Production; quantity produced, created, or completed.
• output Production; quantity produced, created, or completed.
• self-regulating Describing something capable of controlling itself.
• short-run When one or more factors are fixed.
• supply The amount of some product that producers are willing and able to sell at a given price, all other factors being held
constant.
• supply The amount of some product that producers are willing and able to sell at a given price, all other factors being held
constant.
• Supply curve A graph that illustrates the relationship between the price of a good and the quantity supplied.
• supply shock An event that suddenly changes the price of a commodity or service. It may be caused by a sudden increase or
decrease in the supply of a particular good.
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Aggregate Demand and Supply
Aggregate Expenditure
This graph shows the aggregate expenditure model. It is used to determine and graph the real GPD, potential GDP, and point of equilibrium. A shift in
supply or demand impacts the GDP.
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Wikipedia. "Keynesian cross and growth in expenditure." CC BY-SA http://en.wikipedia.org/wiki/File:Keynesian_cross_and_growth_in_expenditure.png View on
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Aggregate Demand and Supply
Aggregate Expenditure - Equilibrium
In this graph, equilibrium is reached when the total demand (AD) equals the total amount of output (Y). The equilibrium point is where the blue line
intersects with the black line.
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Aggregate Demand and Supply
Classical Aggregate Expenditure
This graph shows the classical aggregate expenditure where C is consumption expenditure and I is aggregate investment. The aggregate expenditure is
the aggregate consumption plus the planned investment (AE = C + I).
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Aggregate Demand and Supply
AD-AS Model
This graph shows the AD-AS model where P is the average price level and Y* is the aggregate quantity demanded. The model is used to show how
increases in aggregate demand leads to increases in prices (inflation) and in output.
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Wikipedia. "AS AD graph." CC BY-SA http://en.wikipedia.org/wiki/File:AS_%252B_AD_graph.svg View on Boundless.com
Aggregate Demand and Supply
1953 U.S. Recession
This graph shows the economic recession that occurred in the U.S. in 1953. During recessions, the government can use the multiplier effect in order to
stimulate the economy.
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Aggregate Demand and Supply
AS-AD Model
This AS-AD model shows how the aggregate supply and aggregate demand are graphed to show economic output. The AD curve shifts to the right
which increases output and price.
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Aggregate Demand and Supply
Adam Smith
Adam Smith was one of the individuals who helped establish classical economic theory.
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Aggregate Demand and Supply
John Maynard Keynes
John Maynard Keynes introduced Keynesian theory in his book, The General Theory of Employment, Interest, and Money.
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Aggregate Demand and Supply
Aggregate Demand and Supply
This graph demonstrates the basic relationship between aggregate demand and aggregate supply. The aggregate demand curve is derived via the
consumption, investment, government spending, and net export.
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Wikimedia. CC BY-SA http://upload.wikimedia.org/wikipedia/commons/9/96/Ad-ad-as.svg View on Boundless.com
Aggregate Demand and Supply
Mundell-Fleming Fixed Exchange Rate Illustration
An increase in government spending forces the monetary authority to supply the market with local currency to keep the exchange rate unchanged.
Shown here is the case of perfect capital mobility, in which the BoP curve (or, as denoted here, the FE curve) is horizontal.
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Aggregate Demand and Supply
IS-LM Model
The IS-LM model takes investments and savings and compares that to liquidity and the overall money supply. It is highly useful in understanding
macroeconomics from a Keynesian perspective. Interest rates (i) are on the vertical axis, and output (y) is on the horizontal axis.
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Aggregate Demand and Supply
Aggregate Supply/Aggregate Demand
This graph illustrates the relationship between price and output within a given economic system in the context of aggregate demand and supply.
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Aggregate Demand and Supply
Aggregate Supply
Aggregate supply is the total quantity of goods and services supplied at a given price. Its intersection with aggregate demand determines the equilibrium
quantity supplied and price.
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Aggregate Demand and Supply
Aggregate Supply Curve
This graph shows the aggregate supply curve. In the short-run the aggregate supply curve is upward sloping. When the curve shifts outward, it is due to
an increase in output and real GDP.
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Aggregate Demand and Supply
Aggregate Supply
This graph shows the aggregate supply curve. In the long-run the aggregate supply curve is perfectly vertical, reflecting economists' belief that changes
in aggregate demand only cause a temporary change in an economy's total output.
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Aggregate Demand and Supply
Aggregate Supply
This graph shows the relationship between aggregate supply and aggregate demand in the short-run. The curve is upward sloping and shows a positive
correlation between the price level and output.
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Aggregate Demand and Supply
Short-run Aggregate Supply
This graph shows the Aggregate Suppy-Aggregate Demand model. In regards to aggregate supply, increases or decreases in the price level and output
cause the aggregate supply curve to shift in the short-run.
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Aggregate Demand and Supply
Equilibrium
Similar to microeconomic equilibrium, the macroeconomic equilibrium is the point at which the aggregate supply intersects the aggregate demand.
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Aggregate Demand and Supply
Aggregate supply
This graph shows the three stages of aggregate supply. It is the total supply of goods and services that firms in a national economy plan to sell during a
specific time period. Changes in aggregate supply cause shifts along the supply curve.
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Aggregate Demand and Supply
AS-AD Model
The Aggregate Supply-Aggregate Demand Model shows how equilibrium is determined by supply and demand. It shows how increases and decreases
in output and prices impact the economy in the short-run and long-run. The model is also used to show real and potential output.
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Aggregate Demand and Supply
Supply Shift
A supply shock could be caused by changing regulations or a sudden change in the price of an input, among other reasons.
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Aggregate Demand and Supply
Which of the following is NOT part of the equation for aggregate
expenditure?
A) Cost
B) Investment
C) Government expenditure
D) Net exports
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Aggregate Demand and Supply
Which of the following is NOT part of the equation for aggregate
expenditure?
A) Cost
B) Investment
C) Government expenditure
D) Net exports
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Aggregate Demand and Supply
Classical economists assume that _________.
A) Supply creates its own demand.
B) Wages, prices, and interest rates are all flexible.
C) The economy works on full-employment equilibrium.
D) All of these answers
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Aggregate Demand and Supply
Classical economists assume that _________.
A) Supply creates its own demand.
B) Wages, prices, and interest rates are all flexible.
C) The economy works on full-employment equilibrium.
D) All of these answers
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Aggregate Demand and Supply
Assume the economy is at full potential output. If the aggregate
demand curve shifts to the left, what will happen?
A) Output will fall slightly and prices will fall dramatically
B) Output will increase dramatically and prices will increase slightly
C) Output will fall dramatically and prices will fall slightly
D) Output will increase slightly and prices will increase dramatically
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Aggregate Demand and Supply
Assume the economy is at full potential output. If the aggregate
demand curve shifts to the left, what will happen?
A) Output will fall slightly and prices will fall dramatically
B) Output will increase dramatically and prices will increase slightly
C) Output will fall dramatically and prices will fall slightly
D) Output will increase slightly and prices will increase dramatically
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Aggregate Demand and Supply
Which of the following statements about the fiscal multiplier effect
is NOT true?
A) The multiplier effect is only influenced by government spending
B) The multiplier effect is influenced by spending
C) The multiplier effect can increase negative externalities
D) The multiplier effect can cause crowding out
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Aggregate Demand and Supply
Which of the following statements about the fiscal multiplier effect
is NOT true?
A) The multiplier effect is only influenced by government spending
B) The multiplier effect is influenced by spending
C) The multiplier effect can increase negative externalities
D) The multiplier effect can cause crowding out
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Aggregate Demand and Supply
According to Hume, in the short run, an increase in the money
supply will ________, and in the long run, an increase in the
money supply will _________.
A) decrease production; do nothing
B) do nothing; increase production
C) increase production; do nothing
D) do nothing; decrease production
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Aggregate Demand and Supply
According to Hume, in the short run, an increase in the money
supply will ________, and in the long run, an increase in the
money supply will _________.
A) decrease production; do nothing
B) do nothing; increase production
C) increase production; do nothing
D) do nothing; decrease production
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Aggregate Demand and Supply
Classical economists assume that _________.
A) real GDP can be determined without knowing the money supply or
rate of inflation
B) real and nominal variables can be analyzed separately
C) money affects only price and wage levels
D) All of these answers
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Aggregate Demand and Supply
Classical economists assume that _________.
A) real GDP can be determined without knowing the money supply or
rate of inflation
B) real and nominal variables can be analyzed separately
C) money affects only price and wage levels
D) All of these answers
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Aggregate Demand and Supply
Suppose a government provided stimulus money to businesses in
order to reverse an economic downturn. This action most closely
aligns with which of the following economic schools of thought?
A) Classical school
B) Austrian school
C) Keynesian school
D) Rational expectations school
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Aggregate Demand and Supply
Suppose a government provided stimulus money to businesses in
order to reverse an economic downturn. This action most closely
aligns with which of the following economic schools of thought?
A) Classical school
B) Austrian school
C) Keynesian school
D) Rational expectations school
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Aggregate Demand and Supply
Which of the following is NOT one of the demand sources
incorporated when calculating aggregate demand?
A) Consumption
B) Savings
C) Investment
D) Government Spending
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Aggregate Demand and Supply
Which of the following is NOT one of the demand sources
incorporated when calculating aggregate demand?
A) Consumption
B) Savings
C) Investment
D) Government Spending
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Aggregate Demand and Supply
Of the factors which contribute to the downward slope of the
aggregate demand curve, which is best described as the
incorporation of nominal exchange rates into the IS-LM model?
A) Pigou's Wealth Effect
B) Keynes' Interest Rate Effect
C) Mundell-Fleming Exchange Rate Effect
D) Aggregate Supply Effect
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Aggregate Demand and Supply
Of the factors which contribute to the downward slope of the
aggregate demand curve, which is best described as the
incorporation of nominal exchange rates into the IS-LM model?
A) Pigou's Wealth Effect
B) Keynes' Interest Rate Effect
C) Mundell-Fleming Exchange Rate Effect
D) Aggregate Supply Effect
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Aggregate Demand and Supply
Which of the following could shift aggregate demand to the left?
A) An exogenous increase in transfer payments from the government
B) An exogenous increase in intended inventory investment
C) An exogenous increase in taxes levied
D) An exogenous increase in the nominal money supply
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Aggregate Demand and Supply
Which of the following could shift aggregate demand to the left?
A) An exogenous increase in transfer payments from the government
B) An exogenous increase in intended inventory investment
C) An exogenous increase in taxes levied
D) An exogenous increase in the nominal money supply
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Aggregate Demand and Supply
Which of the following statements about aggregate supply is NOT
true?
A) Long-run aggregate supply is graphed vertically.
B) Aggregate supply is the relationship between the price level and
production of the economy.
C) Short-run aggregate supply is graphed as a downward sloping curve.
D) Long-run aggregate supply considers the production of the economy
and natural production level.
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Aggregate Demand and Supply
Which of the following statements about aggregate supply is NOT
true?
A) Long-run aggregate supply is graphed vertically.
B) Aggregate supply is the relationship between the price level and
production of the economy.
C) Short-run aggregate supply is graphed as a downward sloping curve.
D) Long-run aggregate supply considers the production of the economy
and natural production level.
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Aggregate Demand and Supply
What factors are fixed in the short run?
A) Prices, wages, capital, and labor
B) Prices and wages
C) Capital and labor
D) Prices, wages, and capital
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Aggregate Demand and Supply
What factors are fixed in the short run?
A) Prices, wages, capital, and labor
B) Prices and wages
C) Capital and labor
D) Prices, wages, and capital
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Aggregate Demand and Supply
Which of the following is a real-world interpretation of the vertical
long run aggregate supply curve?
A) In the long run, GDP will respond to changes in the price level but not
changes in inputs
B) In the long run, GDP will grow at a constant, unchanging rate
C) All of these answers
D) The long-run level of potential GDP is not affected by changes in
demand or prices
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Aggregate Demand and Supply
Which of the following is a real-world interpretation of the vertical
long run aggregate supply curve?
A) In the long run, GDP will respond to changes in the price level but not
changes in inputs
B) In the long run, GDP will grow at a constant, unchanging rate
C) All of these answers
D) The long-run level of potential GDP is not affected by changes in
demand or prices
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Aggregate Demand and Supply
What will happen if available capital increases?
A) The supply curve will shift to the right, prices will rise, and quantity will
fall
B) The supply curve will shift to the right, prices will drop, and quantity will
increase
C) The supply curve will shift to the left, prices will drop, and quantity will
increase
D) The supply curve will shift to the left, prices will rise, and quantity will
fall
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Aggregate Demand and Supply
What will happen if available capital increases?
A) The supply curve will shift to the right, prices will rise, and quantity will
fall
B) The supply curve will shift to the right, prices will drop, and quantity will
increase
C) The supply curve will shift to the left, prices will drop, and quantity will
increase
D) The supply curve will shift to the left, prices will rise, and quantity will
fall
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Aggregate Demand and Supply
Which of the following factors does NOT cause the short-run
aggregate supply curve to shift?
A) Changes in quality of labor
B) Quantity that stays the same
C) Taxes and subsides
D) Prices of raw materials
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Aggregate Demand and Supply
Which of the following factors does NOT cause the short-run
aggregate supply curve to shift?
A) Changes in quality of labor
B) Quantity that stays the same
C) Taxes and subsides
D) Prices of raw materials
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Aggregate Demand and Supply
Which of the factors may vary when building a long run supply
curve?
A) Labor only
B) Capital and technology
C) Technology only
D) Capital, labor, and technology
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Aggregate Demand and Supply
Which of the factors may vary when building a long run supply
curve?
A) Labor only
B) Capital and technology
C) Technology only
D) Capital, labor, and technology
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Aggregate Demand and Supply
What could cause the aggregate demand curve to shift to the left
in the short run?
A) Households anticipate their income will decrease in the future so they
reduce consumption today.
B) General price levels fall
C) Households decrease their savings today
D) The government increases its consumption
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Aggregate Demand and Supply
What could cause the aggregate demand curve to shift to the left
in the short run?
A) Households anticipate their income will decrease in the future so they
reduce consumption today.
B) General price levels fall
C) Households decrease their savings today
D) The government increases its consumption
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Aggregate Demand and Supply
Which of the following statements about the shift in aggregate
supply is NOT true?
A) There are three ranges in aggregate supply curve including:
Keynesian, Classical, and Intermediate.
B) Aggregate supply is the total supply of goods and services produced in
an economy
C) In the short-run, there is only one fixed factor of production, usually
capital.
D) In the long-run, only capital, labor, and technology affect the
aggregate supply curve.
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Aggregate Demand and Supply
Which of the following statements about the shift in aggregate
supply is NOT true?
A) There are three ranges in aggregate supply curve including:
Keynesian, Classical, and Intermediate.
B) Aggregate supply is the total supply of goods and services produced in
an economy
C) In the short-run, there is only one fixed factor of production, usually
capital.
D) In the long-run, only capital, labor, and technology affect the
aggregate supply curve.
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Aggregate Demand and Supply
Attribution
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Aggregate Demand and Supply
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