11 C H A P T E R
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Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve 11 C HAPTE R Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 1 Aggregate Demand and Aggregate Supply Next Slide Copyright McGraw-Hill/Irwin 2002 AGGREGATE DEMAND Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 2 Next Slide Defined: The amounts of real output that buyers collectively desire to purchase at each possible price level Aggregate Demand Curve Down Sloping Due To: •Real-Balances Effect •Interest-Rate Effect •Foreign Purchases Effect Copyright McGraw-Hill/Irwin 2002 DERIVATION OF THE AGGREGATE DEMAND CURVE Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level AE1 at P 1 Aggregate expenditures (billions of dollars) Aggregate Demand 2 3 0 Changes in AD & AS Key Terms Previous Slide End Show 11 - 3 Next Slide Price level Changes in Equilibrium Multiplier & Price Changes AE2 at P 2 AE3 at P 3 1 P3 GDP3 GDP2 GDP1 3’ P2 1’ P1 0 The Aggregate Demand Can Be Constructed 2’ AD GDP3 GDP2 GDP1 Copyright McGraw-Hill/Irwin 2002 CHANGES IN AGGREGATE DEMAND Aggregate Demand Aggregate Demand Can Increase Derivation of the AD Curve Changes in AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Price level Determinants of AD Multiplier & Price Changes AD2 Changes in AD & AS Key Terms Previous Slide End Show 11 - 4 AD1 Next Slide Real domestic output, GDP Copyright McGraw-Hill/Irwin 2002 CHANGES IN AGGREGATE DEMAND Aggregate Demand Aggregate Demand Can Increase Derivation of the AD Curve Changes in AD Determinants of AD Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium …or Decrease Price level Shifts in AE Schedule and Curve Multiplier & Price Changes Changes in AD & AS Key Terms AD3 Previous Slide End Show 11 - 5 Next Slide AD1 Real domestic output, GDP Copyright McGraw-Hill/Irwin 2002 DETERMINANTS OF AGGREGATE DEMAND Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 6 Next Slide Change in Consumer Spending • Consumer Wealth • Consumer Expectations • Consumer Indebtedness • Taxes Change in Investment Spending • Real Interest Rates • Expected Returns • Expected Future Business Conditions • Technology • Degree of Excess Capacity • Business Taxes Copyright McGraw-Hill/Irwin 2002 DETERMINANTS OF AGGREGATE DEMAND Aggregate Demand Government Spending Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Net Export Spending • National Income Abroad • Exchange Rates Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 7 Next Slide Changes in Aggregate Demand Shifts and the Aggregate Expenditures Model Illustrated… Copyright McGraw-Hill/Irwin 2002 SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in AD & AS Key Terms Price level Multiplier & Price Changes End Show 11 - 8 AE1 at P 1 Increase in Aggregate Expenditures 0 Changes in Equilibrium Previous Slide AE2 at P 2 Aggregate expenditures (billions of dollars) Aggregate Demand GDP1 GDP2 Increase in Aggregate Demand P1 Next Slide AD1 0 Copyright McGraw-Hill/Irwin 2002 GDP1 GDP2 AD2 AGGREGATE SUPPLY Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 9 Next Slide Defined: The amounts of real output that firms will produce at each possible price level Higher Price Levels Provide An Incentive to Produce More Aggregate Supply Has Three Segments or Ranges: 1 - Horizontal Range 2 - Intermediate (Upsloping) Range 3 - Vertical Range Copyright McGraw-Hill/Irwin 2002 AGGREGATE SUPPLY Aggregate Demand Derivation of the AD Curve P Changes in AD Determinants of AD Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Price level Shifts in AE Schedule and Curve Vertical Range Horizontal Range Upsloping or Intermediate Range Changes in AD & AS Key Terms Previous Slide End Show 11 - 10 Next Slide Q Real domestic output, GDP Copyright McGraw-Hill/Irwin 2002 AGGREGATE SUPPLY Aggregate Demand Derivation of the AD Curve P Changes in Aggregate Supply AS3AS1AS2 Changes in AD Determinants of AD Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Price level Shifts in AE Schedule and Curve Decrease In Aggregate Supply Increase In Aggregate Supply Changes in AD & AS Key Terms Previous Slide End Show 11 - 11 Next Slide Q Real domestic output, GDP Copyright McGraw-Hill/Irwin 2002 DETERMINANTS OF AGGREGATE SUPPLY Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 12 Next Slide Change in Input Prices Domestic Resource Availability • Land • Labor • Capital • Entrepreneurial Ability Prices of Imported Goods Market Power Copyright McGraw-Hill/Irwin 2002 DETERMINANTS OF AGGREGATE SUPPLY Aggregate Demand Derivation of the AD Curve Change in Productivity Changes in AD Determinants of AD Shifts in AE Schedule and Curve Productivity = Real Output Input Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 13 Next Slide Change in Legal-Institutional Environment • Business Taxes and Subsidies • Government Regulation Copyright McGraw-Hill/Irwin 2002 Aggregate Demand Derivation of the AD Curve Changes in AD EQUILIBRIUM: REAL OUTPUT AND THE PRICE LEVEL P AS Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Price Level Determinants of AD Equilibrium in the Intermediate Range Pe P1 Key Terms AD Previous Slide End Show 11 - 14 Next Slide Q1 Qe Q2 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 Q Aggregate Demand Derivation of the AD Curve Changes in AD EQUILIBRIUM: REAL OUTPUT AND THE PRICE LEVEL P AS Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Price Level Determinants of AD Equilibrium in the Horizontal Range Pe Key Terms AD Previous Slide End Show 11 - 15 Next Slide Q1 Qe Q2 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 Q CHANGES IN EQUILIBRIUM Aggregate Demand Derivation of the AD Curve Changes in AD Increasing Demand in the Horizontal Range P AS Determinants of AD Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS AD1 Price Level Shifts in AE Schedule and Curve P1 Key Terms AD2 Previous Slide End Show 11 - 16 Next Slide Q1 Q2 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 Q CHANGES IN EQUILIBRIUM Aggregate Demand Derivation of the AD Curve Changes in AD Increasing Demand in the Intermediate Range P AS Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Price Level Determinants of AD P4 P3 Key Terms AD3 AD4 Previous Slide End Show 11 - 17 Next Slide Q3 Q4 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 Q CHANGES IN EQUILIBRIUM Aggregate Demand Derivation of the AD Curve Changes in AD Increasing Demand in the Vertical Range P AS Determinants of AD Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes P6 Price Level Shifts in AE Schedule and Curve P5 AD5 AD6 Changes in AD & AS Key Terms Previous Slide End Show 11 - 18 Next Slide Qc Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 Q Aggregate Demand Derivation of the AD Curve MULTIPLIER WITH PRICE-LEVEL CHANGES Inflation and the Multiplier Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Price Level Determinants of AD Shifts in AE Schedule and Curve AS Full Multiplier Effect Changes in AD Reduced Multiplier Effect Due to Inflation P2 AD3 P1 Key Terms Previous Slide End Show 11 - 19 Next Slide AD1 GDP1 GDP2 AD2 GDP3 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 DECREASES IN AD AND RECESSION Aggregate Demand Derivation of the AD Curve Changes in AD Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 20 Next Slide Decreasing Demand That Causes A Recession Recession and Cyclical Unemployment •Wage Contracts •Morale, Effort, and Productivity •Efficiency Wages •Minimum Wage •Menu Costs •Fear of Price Wars Copyright McGraw-Hill/Irwin 2002 DECREASES IN AD AND RECESSION Aggregate Demand Decreasing Demand That Causes A Recession Derivation of the AD Curve AS Changes in AD Determinants of AD Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS AD2 Price Level Shifts in AE Schedule and Curve P1 Key Terms AD1 Previous Slide End Show 11 - 21 Next Slide Q2 Q1 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 DECREASES IN AD AND RECESSION Aggregate Demand Decreasing Supply That Causes A Recession Derivation of the AD Curve AS2 AS1 Changes in AD Determinants of AD Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes P2 Price Level Shifts in AE Schedule and Curve P1 Changes in AD & AS Key Terms Previous Slide End Show 11 - 22 AD Next Slide Q2 Q1 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 INCREASES IN AS AND INFLATION Aggregate Demand Derivation of the AD Curve Increasing Supply: Full-Employment and Price-Level Stability AS1 AS2 Changes in AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Price Level Determinants of AD P3 P2 P1 Changes in AD & AS AD2 Key Terms AD1 Previous Slide End Show 11 - 23 Next Slide Q1 Q2 Q3 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 INCREASES IN AS AND INFLATION Aggregate Demand Derivation of the AD Curve Increasing Supply: Full-Employment and Price-Level Stability AS1 AS2 Changes in AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Price Level Determinants of AD P3 P2 P1 Chapter Conclusions Changes in AD & AS AD2 Key Terms AD1 Previous Slide End Show 11 - 24 Next Slide Q1 Q2 Q3 Real Domestic Output, GDP Copyright McGraw-Hill/Irwin 2002 aggregate demandaggregate supply (ADAS) model aggregate demand real-balances effect interest-rate effect foreign purchases effect determinants of aggregate demand aggregate supply horizontal range (of AS curve) Copyright McGraw-Hill/Irwin, 2002 intermediate range (of AS curve) vertical range (of AS curve) determinants of aggregate supply productivity equilibrium price level equilibrium real output efficiency wages menu costs BACK END Aggregate Demand Derivation of the AD Curve Coming next... Changes in AD FISCAL POLICY Determinants of AD Shifts in AE Schedule and Curve Aggregate Supply Equilibrium Real Output & Price Level Changes in Equilibrium Multiplier & Price Changes Changes in AD & AS Key Terms Previous Slide End Show 11 - 26 Chapter 12 Next Slide Copyright McGraw-Hill/Irwin 2002
