Trevor Thornton
Macroeconomics
MWF 11:00
E-Portfolio Paper
I have decided to use some examples from an earlier Mid Term taken in this
class for the premise of this paper. The test focused mainly on Aggregate Demand
and Aggregate Supply and how they work in the economy. I will use definitions and
a few graphs as examples throughout the paper.
What is Aggregate Demand? Aggregate Demand shows the amounts of Real
GDP (Gross Domestic Product) that buyers collectively desire to purchase at each
possible price level. When it comes to Aggregate Demand, the relationship between
Real GDP demanded and the Price Level is “inverse” or “negative”.
Aggregate Supply shows the relationship between the price level and the
amount of Real GDP that companies or firms in the economy produce. There are
three ways this varies – immediate short run, short run, and long run. In this paper,
I am focusing on the ‘short run’, which means input prices are fixes but output
prices can vary.
The intersection of Aggregate Demand and Aggregate Supply establishes the
economy’s equilibrium price level and GDP. Aggregate Demand and Aggregate
Supply jointly establish the price level and level of GDP.
Aggregate Demand has a negative slope and Aggregate Demand has a
positive slope. Below are the reasons for each curve and what causes them to shift
they way they do.
Aggregate Demand
1. Real Balances Effect – This is the tendency for increases in the price level to
lower the purchasing power of financial assets with fixed money value and,
as a result, to reduce total spending and real output, and conversely for
decreases in the price level.
2. Interest Rate Effect – This basically states that the lower the price, the lower
the demand for money. When the prices are lowered, interest rates are also
lowered.
3. Foreign Purchases Effect – This is the inverse relationship between the net
exports of an economy and its price level related to foreign price levels.
Aggregate Supply
1. Change in input prices. These are either domestic or imported.
2. Change in productivity. Productivity = Total Input/Total Output
3. Change in legal-institutional environment. This includes businesses taxes
and subsidies, and government regulations.
Sources
Macroeconomics: Theory through Applications v. 1.0.
http://catalog.flatworldknowledge.com/bookhub/reader/2498?e=coopermacroch04_s01
Economics Interactive: By, Ralph Byrns.
http://www.unc.edu/depts/econ/byrns_web/Economicae/Figures/Ag_Supply.htm
Macroeconomics: By, Campbell R. McConnell & Stanley R. Brue (17th Edition)