Chapter 24: Aggregate Demand and Aggregate Supply
Aggregate Demand
- Aggregate Demand is the total amount of output that will be
bought at various price levels.
The Aggregate Demand Curve
- An Aggregate Demand Curve illustrates aggregate demand.
- As the price of level falls, a greater quantity of real output will be
demanded and vice versa.
- The aggregate demand curve slopes downward.
Reasons from the Shape of the Aggregate Demand Curve
- A rise in the price level means less of a total output will be
demanded.
- The Fallacy of Composition is the assumption that what is true of
the part must also be true of the whole.
Factors that Shift the AD Curve
- Price level changes will not cause the AD curve to shift.
- The AD curve will shift if there is a change in aggregate
expenditure (AE)
- An increase in AD is shown by a shift in the AD curve to the right
- A decrease in AD is shown b a shift in the AD curve to the left.
Aggregate Supply
- Aggregate Supply is the levels of output supplied at various
prices.
- The AS slopes upward from left to right.
- As price level rises, the total output of goods and services rises.
The Aggregate Supply Curve
- An aggregate supply curve illustrates the total supply of goods
and services.
Reasons for the Shape of the Aggregate Supply Curve
- The aggregate supply curve may have a horizontal section, an
intermediate section, and a vertical section.
Horizontal Section
- The horizontal section of an AS curve, the Keynesian Range,
represents high employment.
The Intermediate Section
- In the Intermediate (upward sloping) Range of an AS curve, real
output and price level are related.
The Vertical Section
- In the Classical (vertical) Range of an AS curve, output is at a
maximum.
Factors that Shift the AS Curve
- An increase in AS is shown by a shift to the right and a decrease
is shown upward shift to the left.
- A reduction in production costs will cause AS to shift right and an
increase in costs will cause it to shift upward to the left.
Equilibrium Real Output and the Price Level
- The equilibrium level of real output and the equilibrium price
level occur at the intersection of the aggregate demand and
aggregate supply curves.
Effects of Changes in Aggregate Demand
- An increase in aggregate demand in the intermediate range
results in an increase in the price level and an increase in real
output.
- An increase in AD in the Keynesian range results in an increase
in real output, but no change in price level.
- An increase in AD in the classical range results in an increase in
the price level, but no change in real output.
- The government can shift the Ad curve through its monetary and
fiscal policies.
- Fiscal Policy refers to changes in government spending and
taxes, designed to change AD.
- Monetary Policy refers to changes in the money supply and
interest rates in an attempt to influence AD.
Government Policies to Reduce Unemployment
- Expansionary demand policies can reduce unemployment,
Government Policies to Reduce Inflation
- Contractionary demand policies such as increasing interest rates
can reduce inflation
Effects of Changes in Aggregate Supply
- Changes in production costs, technology, and productivity can
shift the aggregate supply curve.
-
An increase in AS results in an increase in real output and a fall
in the price level.
A decrease in AS results in a fall in real output and a rise in the
price level.
Supply-Side Policies
- Supply-Side Economics stresses incentives to work, save and
invest.
- The Marginal Tax Rate is the ratio of the change in taxes to the
change in income. MTR = (Change in Taxes) divided b (Change
in Income)
- The Laffer Curve helps to explain supply-side philosophy.
- There is a considerable controversy over the effectiveness of
government supply-side policies.