Download Aggregate Demand Aggregate Supply

Aggregate Demand
Aggregate demand for current output, Yd, is:
Yd = C + I + G + NX.
The AD curve slopes downward because an increase in the
price level reduces the aggregate demand for output:
P up …(M/P) falls … wealth falls … C down
P up …(M/P) falls … real interest rate up … C and I down
P up …(M/P) falls … real rate up … $ rises … NX down
P up …Exports fall and Imports rise
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Aggregate Demand Curve
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Aggregate Supply
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The aggregate supply curve shows the output
supplied at each price level.
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The short-run aggregate supply curve slopes upward
New Classical “misperceptions”
New Keynesian stick prices: long-term and staggered contracts, menu costs
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The long-run aggregate supply curve is vertical at full
employment output, Y *  The Green Shaft
The LRAS shifts over time to reflect growth in the fullemployment level of output
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Changes in productivity
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Technology
Incentives
Increases in Kapital stock and in laborforce
Copyright © 2002 Pearson Education, Inc.
The Short-Run and Long-Run
Aggregate Supply Curves
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Equilibrium
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The short-run equilibrium occurs at the
intersection of the AD and SRAS curves.
In the long run the price level adjusts and output
returns to Y *…The GREEN SHAFT
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The real business cycle view argues short-term output
changes due to productivity shocks.
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Short-Run Equilibrium
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Adjustment to Long-Run Equilibrium:
Price at E1’ is above Pe  SRAS shifts up
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Short-Run Results in the Real
Business Cycle Model
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Economic Fluctuations in the
United States
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From 1964-1969: Expansionary monetary
and fiscal policies caused AD to shift right.
From 1973-1975: A supply shock resulted
in SRAS shifting up and to the left.
1990-1991: A credit crunch, shifting AD to
the left, which resulted in SRAS shifting
down and to the right.
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Output Growth and Inflation, 19602000
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