Aggregate Demand and
Aggregate Supply
總和需求與總和供給
1/37
Planned aggregate expenditure (PAE)
Recall: Goods Market (Planned Aggregate
Expenditure; Aggregate Demand)
Y = PAE
PAE = C + Ip + G + NX
這是實質模型，沒有價格
45o
Y*
Output (Y)
2/37
Recall: Money Market (Money Supply
and Money Demand)
Nominal interest rate (i)
MS
貨幣市場，貨幣供需
E
i
MD
M
Money (M)
3/37
Monetary Policy Rule (MPR)
央行心中應有一個法則，百姓會揣摩
Real interest rate set by
Fed, r
The monetary policy rule (貨幣政策法則): the action
a central bank takes in response to changes in the
economy.
MPR
 The Fed raises or lowers interest
0.06 rate to respond to
changes in inflation rate.
0.05
0.04
0.03
0.02
0.01 0.02 0.03 0.04
Inflation 
4/37
Learning Objectives:
1. Define the aggregate demand curve (AD; 總合需求線).
Explain why it slopes downward.
Explain why it shifts.
2. Define the aggregate supply curve (AS; 總合供給線).
Explain why it slopes upward.
Explain why it shifts.
3. Show how aggregate supply and aggregate demand
determine short-run output and inflation. (產出和物價)
Show how aggregate demand, aggregate supply, and
the long-run aggregate supply curve (LRAS; 長期總合
供給線) determine long-run output and inflation.
這個模型有短期和長期的分別，請特別留意
5/37
Learning Objectives:
4. Analyze how the economy adjusts to
expansionary and recessionary gaps.缺口的調整
方式
Relate this to the idea of a self-correcting economy.
經濟體自我調整的機制
5. Use the aggregate demand – aggregate supply
model to study the sources of inflation in the
short run and in the long run.
短期和長期造成通貨膨脹的原因
6/37
Introduction:
 The Keynesian model assumes that producers meet demand at
preset prices.凱因斯是實質模型，不談價格
When firms produce what is demanded, PAE determines
the GDP.
 Output gaps can cause inflation to increase (if expansionary
gap) or decrease (if recessionary gap).
 The aggregate demand - aggregate supply (AD-AS) model
studies both inflation and output.
 AD-AS 模型討論產出和物價
Effective for analyzing and tracing the effects of fiscal and
monetary policies on the economy.財政政策和貨幣政策 7/37
The Aggregate Demand Curve:
總需求曲線的推導
Aggregate demand (AD) is the total demand for
goods and services in the economy.
AD curve is negative sloping
because of central bank’s monetary
policy rule:
When inflation increases, the
Fed raises interest rates, which
causes total planned spending to fall.
Inflation ()
Aggregate demand curve shows the relationship
between short-run equilibrium output, Y, and the
inflation rate, , holding all other factors constant.
A
D 8/37
Output (Y)
The Aggregate Demand Curve:
At all points along the AD curve, short-run
equilibrium output equals total planned spending.
AD線上短期均衡產出等於計畫支出
At all points along the AD curve, both the goods
market (商品市場) and the money market (貨幣市
場) are in equilibrium.
經濟意義是：AD線上兩個市場都達到均衡
商品市場：Keynesian basic model
貨幣市場：Monetary policy rule
所以，AD線段是由上述兩個市場推導出來
9/37
A
2
Inflation ()
1
 Initial conditions: 1, r1, Y1
 Point A on AD curve.
 Now inflation increases to 2
 Fed increases real interest
rate from r1 to r2.
 The rise in real interest rate
causes planned spending and
output decreases from Y1.
 PAE shifts down.
 Point B on AD curve.
Planned Spending
(PAE)
r1
MPRF
A
PAE
(r = r1)
PAE
(r = r2)
B
Y2
Inflation ()
Real interest rate (r)
r2
B
Y = PAE
2
Y1
Output (Y)
B
1
A
AD
Y2
Y1 Output (Y)
10/37
Shifts in Aggregate Demand Curve:
AD線段移動有兩個成因
 Consumer wealth.
 Consumer confidence.
 New technology.
 Fiscal policy.
 Foreign demand for domestic goods.
Inflation ()
 At a given inflation rate, aggregate demand shifts when:
(1) Exogenous changes (外生變動) in spending occur
支出行為改變. (Keynesian basic model)
(2) Fed's monetary policy rule changes.
央行的貨幣反應法則改變 (MPR 改變)
 Many factors other than output
or the real interest rate would
affect total spending. They are
the so-called exogenous factors.
模型外的稱為外生，包括
AD'
AD
Output (Y)
11/37
1. Exogenous Changes in Spending:
外生支出增加對於 AD 線的影響
Inflation ()
 Increase in consumer wealth would increase the aggregate
demand.
Consumer wealth increases.
 Consumption increases.
 PAE curve shifts up.
Y increases for each
given level of .
Aggregate demand
curve shift to the right.
A
A
三個圖形的推導
D'
D
Output (Y)
12/37
Exogenous Changes in Spending:
C, I, G, NX, 任一項目帶來的變動效果
 Decrease in consumer confidence may lead firms to
decrease their planned investment.消費者信心下降，
投資減少 (I)
 New technology would lead firms to increase their
planned investment. 科技帶動新投資 (I)
 Expansionary fiscal policy  government purchases
increase or income taxation reduction  total planned
spending increases. 政府支出增加 (G)
 Contractionary fiscal policy  government purchases
decrease or income tax rate increases  total planned
spending decreases. 政府支出減少
 淨出口 (NX) 增加，或淨出口減少
13/37
2. Central Bank’s Monetary Policy Rule Changes:
央行貨幣政策法則改變對AD的影響
Central bank’s monetary policy rule describes
how central banks set the real interest rate at
each level of inflation.
Suppose the Fed's long-run targets are 1 and r1
Fed can tighten or ease
monetary policy.
To shift MPR.
Real interest rate (r)
Normally, Fed follows a stable MPR.
MPR
r1
1
Inflation ()
14/37
Tightening Monetary Policy (緊縮貨幣政策):
 Tightening monetary: a situation where a central bank
lowers its long-run inflation target.通膨目標下降
 Tighter monetary policy results in each interest rate, r,
being associated with a lower rate of inflation.
A leftward (or upward) shift of the MPR. MPR往上移
動
 在給定的通貨膨脹水準之下，實質利率上升，AD線往左
移動
 如果是寬鬆的貨幣政策，上述的變動方向相反
 請確定可以由圖形推導上述結論
15/37
How Tightening and Easing Monetary
Policy Affect the AD Curve?
MPR'
r2 *
r1 *
B
A
1*
Inflation ()
MPR
Inflation ()
Real interest rate (r)
貨幣政策的改變如何造成AD 線段移動？
1
AD
AD'
A
B
Y2
Y1
Output (Y)
16/37
Inflation and Aggregate Supply:
 Aggregate supply curve (AS) shows the relationship
between the short-run equilibrium Y, and the inflation rate,
, given current inflation expectations and holding all
other factors constant.
 AS線段說明物價膨脹和短期均衡Y的關係
 The level of short-run equilibrium output may happen
to equal the long-run equilibrium output, or potential
output Y*. But that is not necessary case.
Three cases: No output gap, Expansionary gap, and
Recessionary gap.
三種可能狀態：膨脹缺口，緊縮缺口，正常
17/37
AD線段的斜率什麼情況下會改變
兩種可能導致 AD 線段斜率改變
1. 邊際消費傾向改變 (K-AD線斜律改變)
2. 貨幣政策的態度改變 (MPR斜律改變)
請用圖形推導並說明其經濟意義
18/37
Aggregate Supply:
總供給曲線
Aggregate supply curve is positive slope because of the
relation between actual inflation and output gap.
When output is below potential (recession; Y < Y*):
 firms have incentives to cut their prices so that they
can sell more.
 price level falls. 衰退缺口時，物價低
 actual inflation is below expected inflation.
When output is above potential (expansion; Y > Y*):
 the quantity demanded exceeds the quantity
supplied.  firms have incentives to raise their prices.
 price level increases. 膨脹缺口時，物價高
 actual inflation is above expected inflation.
No output gap: firms are satisfied that their sales equal
their sustainable production.
 firms have no incentives to increase or reduce price.
19/37
 inflation is stable.沒有缺口時，物價持平
Aggregate Supply Curve:
Inflation ()
Movement along the AS curve is related to
actual inflation and output gaps.
三種狀態下的物價
Aggregate
Supply (AS)
B
2
A
1
3
C
Y2
Y* Y1
Output (Y)
20/37
Inflation Inertia 通膨慣性; 通膨僵固性:
 In industrial economies, inflation tends to be inertial for
two reasons: 通膨慣性的兩個成因
1. Inflation expectations. 預期心理
2. Long-term wage and price contracts. 長期契約
21/37
1. Inflation Expectations:通膨預期
 Both sellers and buyers take into account the inflation
they expect to prevail in the next year.  Today‘s
expectations of future inflation rate determine the future
inflation rate.今天的預期，未來會實現
 The higher the expected rate of inflation, the more
nominal wages and the cost of other inputs will increase.
 預期心理帶來通貨膨脹的自我實現 self fulfillment
 What determines inflation expectations?
 Expectations are influenced by recent experience.
If inflation is low and stable, people expect that to
continue.預期建立在過去的經驗，正向相關
Volatile inflation leads to volatile expectations.
 Low and stable inflation inflation creates a virtuous 22/37
circle (良性循環) that keeps inflation low.
Expected Inflation :
通貨膨脹預期的自我實現
Slow Increase in
Wages and
Production
Costs
Low
Inflation
Low
Expected
Inflation
23/37
2. Long-Term Wage and Price Contracts:
長期契約
 Long-term contracts reduce the cost of negotiations
between buyers and sellers.
 Labor contracts may be multi-year agreements.
 Long-term contracts serve to build in (內建) wage and
price increases that depend on inflation expectations at the
time the contracts were signed.
 如果長期契約加入通膨調整預期，物價變動自動帶來工資
調整，互相影響
 In the absence of external shocks, inflation tends to be
stable over time.
24/37
Shifts in the AS Curve:
AS 曲線的移動
 Two factors that shift the AS curve:
1. Inflation expectations.通膨預期
2. Inflation shocks.通膨衝擊
 1. If wages and prices rise faster than firms and workers
thought.
  Actual inflation exceeds expectations.
  Expected inflation will increase.
 AS curve shifts to the left (upward).
At each level of output,
inflation is higher.
25/37
Inflation Shocks:通貨膨脹衝擊
 2. Adverse inflation shock: An inflation shock that
causes an increase in inflation, like 1973 oil price crisis.
OPEC dramatically cut its supplies of crude oil in
1973; price of oil quadrupled (4倍).
Food shortages occurred at the same time.
Sharp increase in inflation in 1974.
 An adverse inflation shock shifts the aggregate supply
curve to the left (upward).負面的衝擊造成AS左移
 Favorable inflation shock : An inflation shock that
reduces inflation.
 A favorable inflation shock shifts the aggregate supply
curve to the right.正面的衝擊造成AS 右移
Like oil price decreased in 1986.
這個推理和個體面的供給線和成本變化類似
26/37
Long-Run Aggregate Supply (LRAS)
and AD: 長期均衡
 In the long-run,
Actual output equals potential output (Y = Y*).
Actual inflation equals expected inflation and the central
bank’s long-run inflation target.
 In the long-run, wage rates increase at exactly the same
rate as the overall price level because the price-level
increase is fully anticipated.
 The vertical line (LRAS) the level of potential output Y*.
27/37
Long-Run Equilibrium:長期均衡
Inflation ()
 Graphically, Long-run equilibrium occurs at the
intersection of:
Aggregate demand (AD)
Aggregate supply (AS) and
Long-run aggregate supply (LRAS).
Long-Run Aggregate
Supply (LRAS)
Aggregate
Supply (AS)
Aggregate
Demand (AD)
Y* Output (Y)
28/37
Short-Run Equilibrium:短期均衡
Inflation ()
 The economy does not have to be in long-run at every point
in time. 長短期均衡不一定要都在一起
 Short-run equilibrium occurs when there is either an
expansionary gap or a recessionary gap.在缺口處短期均衡
AD and AS curves can
LRAS
intersect at levels that
above or below the
AS1
potential level Y*.
Ex: point A in the graph.
A
1
 Short-run equilibrium is
AD
temporary.
Y* Y1
Output (Y)
29/37
An Expansionary Gap:
膨脹缺口時如何回復均衡
Inflation ()
 Initial aggregate supply: AS1
Actual output: Y1, potential output Y2, and actual inflation 1.
Initial equilibrium: A.
LRAS
膨脹缺口，物價上升
AS2
AS1
Why AS shifts? 
Changes in workers’ and firms’
2
expectation of inflation
A
1
Expected inflation will increase.
AD
 This causes AS1 to shift to AS2
Y* Y1 Output (Y)
 Actual inflation increases (from 1 to 2).
 As inflation rises, the Fed increases interest rates.
 Consumption and planned investment spending decrease, and planned
aggregate expenditures falls along the AD curve.
30/37
A Recessionary Gap:
衰退缺口時如何回復均衡
Inflation ()
 Initial aggregate supply: AS1
Actual output: Y1, potential output Y2, and actual inflation
1.
LRAS AS1
Initial equilibrium:B.
AS2
 Recessionary gap: output is
B
1
below potential output.
2
 Expected inflation will
decrease (from 1 to 2).
AD
 Makes AS1 to shift to AS2
Y1 Y*
Output (Y)
 Actual inflation falls
(from 1 to 2).
31/37
Self-Correcting Mechanism (自我修正機制):
 Given enough time (long-run), output gaps disappear
without any changes in monetary or fiscal policies.
 By AD-LRAS model, expansionary gaps are eliminated by
raising inflation, while recessionary gaps are eliminated by
decreasing inflation.長期都會自動回復均衡,古典學派想法
 The so-called self-correcting mechanism.自我修正機制
Different from Keynesian model, which concentrates on
the short-run; no price adjustments.
凱因斯模型沒有價格調整，因為他們專注於短期現象
 Since the economy can self-correct, do we need monetary
and fiscal policies?既然自我修正，為何需要政策？
 Whether the stabilization policies are needed depends
on the speed of the self-correction process.是否需要政策，
32/37
重點在於調整速度的快慢
Self-Correcting Mechanism:
(自我修正機制):
 If self-correction takes place very slowly, monetary or
fiscal policies can help to stabilize output or spending.
 如果自我修正的速度太慢，就需要穩定政策
 The less (more) rapid the self-correction process, the
more (less) need for active monetary or fiscal policies to
eliminate output gaps.
When the economy faces a large output gaps, e.g. a
very high unemployment, fiscal and monetary policy
are more likely to useful to eliminate the gap.
如果缺口很大，政策的需要也愈急迫
33/37
Shocks to Potential Output:
可能產出的衝擊
Inflation ()
 A positive shock to potential output causes the longrun aggregate supply (LRAS) curve to shift to the
right.
 正向的衝擊帶來後果
Opens a recessionary gap in the short-run and
decreases inflation rate.
LRAS1 LRAS2
In the long-run, output is
higher and inflation is
1
lower than initial.
有沒有正向衝擊的例子？
2
有沒有負向衝擊的例子？
AD
Y1
Y2
34/37
Output (Y)
Shocks to Potential Output:
可能產出的衝擊
 A positive shock to potential output causes the long-run
aggregate supply (LRAS) curve to shift to the right.
Opens a recessionary gap in the short-run and
decreases inflation rate.
In the long-run, output is higher and inflation is lower
than initial.
Greenspan in 2000: “American economy was
experiencing a once-in-a-century acceleration
of innovation, which propelled forward productivity,
output, corporate profits, and stock prices at pace not
seen in generations…”
35/37
Shocks to Potential Output:
可能產出的衝擊：負面衝擊的時候
 Question: What if an rise in oil prices both creates an
(adverse) inflationary shock and reduces potential output?
Assume: Adverse inflation shock makes AS move to AS2.
Recall: expansionary gap leads to high inflation.
Inflation ()
LRAS2 LRAS1
3
2
AS3
AS2
AS1
1
AD1
Y2
Y*
Output (Y)
36/37
Self-Correcting Economy
Long-Run
Equilibrium
Aggregate
Demand
Shifts
Exogenous
Spending
MPRF Shift
Movement
Along
Inflation
Aggregate
Supply
Short-Run
LRAS
AS
Shifts
Expected
Inflation
Inflation
Shock
37/37