It’s a recession when your neighbor
loses his job, it’s a depression when
you lose yours.
Harry Truman
 Learn about aggregate demand and the factors
that will affect it
 Analyze aggregate supply and the factors that
influence it
 Study the economy’s equilibrium and how it differs
from its potential
 Examine Canada’s historical record of economic
growth.
What determines the connections
among inflation, unemployment, and
levels of spending and real output in
the Canadian economy?
 In the economy as a whole, we see the relationship
between the general price level and total spending
in the economy, which is known as :
Aggregate Demand
Aggregate Demand Curve
Aggregate Demand
Schedule
Price
Level
Real GDP Point on
(1997,
Graph
$ billions)
a
650
200
b
700
160
c
750
120
Price Level (GDP deflator,
1997 = 100)
Aggregate Demand Curve
200
160
120
a
b
80
c
40
0
650
700
AD
750
Real GDP (1997 $ billions)
Relationship between the general
price level and total spending in the
economy expressed on a graph.
800
Two factors cause the aggregate demand curve to be
downward sloping:
The wealth effect that higher prices decrease the real
value of financial assets and decrease consumption,
since households feel poorer than normal.
The foreign trade effect means that higher prices
decrease exports and increase imports.
What causes changes to the aggregate demand??
Remember spending has 4 components:
 An
increase in spending causes a rightward shift in the
curve
 A decrease in spending causes a leftward shift in the
curve
Disposable Income:
Consumer spending is the most significant determinant of disposable income in
the entire economy. The economy’s DI changes as a result of population changes,
as well as DI/household. Therefore, when DI rises, then there is a rise on
consumer spending, adding to total expenditures, and shifting the aggregate
demand curve to the right.
Wealth:
Consists of real (houses and appliances )and financial assets (stocks and bonds).
Eg: if the stock prices increase, a person owning some stocks is going to
experience a real gain in wealth, resulting in a greater likelihood of spending
more of their disposable income. Aggregate demand will increase, and the curve
will shift to the right.
Consumer Expectations:
Consumer expectations influence the demand for products. If there is higher
consumer spending then the aggregate demand increases, and aggregate demand
curve shifts to the right.
Interest Rates:
People often buy durable goods, such as cars and furniture, if the real interest
rate falls, consumers are more likely to borrow to pay for big items. Consumer
spending rises and the Aggregate demand curve shifts to the right.
Investment Demand Curve
12
a
Real
Total
Point on
Projects
Interest Investment
Graph Undertaken
Rate
(%) (1997 $ billions)
12
8
4
0
30
60
a
b
c
-A, B
A, B, C, D
Real Rate of Return and
Real Interest Rate (%)
Investment Demand Schedule
b
8
c
4
A
0
B
C
D1
D
30
60
Investment (1997 $ billions)
In the investment demand curve, it’s the relationship between the interest rate
and investment and depends on the real rate of return and the real interest
rate
Business Expectations: If businesses anticipate that profits will increase,
the investment demand curve shifts to the right, thereby causing an increase in
the aggregate demand.
 If a rise occurs in Government
purchases
Eg: Highway Construction
 Aggregate Demand increases
Foreign Incomes
If incomes increase in foreign countries, then its likely that the citizens of
that country will purchase more products as a result – their own and those
from other countries. Canadian exports increase, thereby increasing
Canada’s aggregate demand.
Exchange Rates
It’s the value of one nation’s currency in terms of another currency. The
impact of exchange rates on prices, are if the Canadian dollar increases in
value, then the net exports fall causing aggregate demand to decrease.
While the reverse occurs, when the Canadian dollar drops in value then the
net exports rise increasing aggregate demand.
Brief Summary
 Changes in the Aggregate Demand are caused by:
Consumption
Investment
Government Purchases
Net Exports.
Economic Fluctuation
Part 2
Aggregate Supply
Review
 -Wealth effect:when the price decrease,household feel
richer,then they may buy more,the consumption will
increase
 -Foreign trade effect:
 lower prices-->increase exports-->decrease imports
 -Aggregate Demand : the relationship between general
price level and total spending in the economy
 -Aggregate demand factors:
C+I+G+Nx = GDP
Consumption:Disposable income,Wealth,Consumer
expectation,Interest Rent
Investment:interest rate,business expectations
Government Purchase
Net Exports:foreign incomes,exchange rate
Aggregate Supply
Aggregate Supply: the relationship between price level and
real output in the economy
Aggregate Supply Curve :
The slope of the total supply curve is upward sloping
Factors that can change in Aggregate Supply Curve
 In Short run(potential output stays constant) :
Aggregate Supply Curve
Price Level (GDP deflator,
1997 = 100)
-Input price
240
AS
d
200
c
160
b
120
a
Potential
Output
80
40
0
750
775
800
825 850 900
Real GDP (2007 $ billions)
Factors that can change in Aggregate Supply Curve
 In Long run(potential output is variable):
 -Resources supplies
 -Government policies
Aggregate Supply Curve
AS0
Price Level (GDP deflator,
1997 = 100)
 -Productivity
AS1
240
200
160
120
40
0
New
Potential
Output
Original
Potential
Output
80
650
675
700
725 750 800
Real GDP (1993 $ billions)
Shifting to Rightward
In short run:
- a fall in wages
- a fall in raw material prices
In Long run:
- more labour supply,capital
stock,land,entrepreneurship
- an increase in productivity
- lower taxes
- less government regulation
Shifting to leftward
In Short run:
-a rise in wages
-a rise in raw material prices
In Long run:
- less labour supply,capital
stock,land,entrepreneurship
- a decrease in productivity
- higher taxes
- more government regulation
Part 3
Aggregate Demand and Supply
Aggregate Demand and Supply
- Inventory Changes
- Results of an inventory increase
- Results of an inventory decrease
- The role of unplanned investment
Injections and withdrawals
- Investment and Saving
- Government purchases and taxes
- Exports and Imports
- Total injections and withdrawals
Equilibrium versus Potential Output
Recessionary Gaps
Inflationary Gaps
Labour productivity
Business cycles
Definitions
Expansion: A sustained rise in the real output of an
economy
Contraction: A sustained fall in the real output of an
economy
Business cycle: The cycle of expansions and
contractions in the economy
Peak: The point in the business cycle at which real
output is at its highest
Effects of a contraction
Recessions and Depressions
Recessions: A decline in real output that lasts for six
months or more
Depression: A particularly long and harsh period of
reduced real output
Trough: The point in the business cycle at which real
output is at its lowest
The highest output
occurs at a peak in the
business cycle. From this
point, the economy
contracts, so aggregate
demand decreases.
Consumer and
business expectations
magnify the downward
trend.
The lowest output
occurs in a trough in a
business cycle. From
this point, the
economy expands, so
aggregate demand
increases.
Expectations
magnify the upward
trend.
--- THE END---