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ECONOMICS
SECOND EDITION
ROBERT E. HALL
STANFORD UNIVERSITY
MARC LIEBERMAN
NEW YORK UNIVERSITY
CHAPTER 26
AGGREGATE DEMAND AND
AGGREGATE SUPPLY
1
Figure 1 The Two-Way Relationship Between Output and
the Price Level
Aggregate Demand Curve
Price
Level
Real
GDP
Aggregate Supply Curve
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
2
(a)
Figure 2 Interest
Rate
Deriving
the
9%
Aggregate 6%
Demand
Curve
M
(b)
Aggregate
Expenditure
($ Trillions)
s
AE r = 6%
E
H
AE r = 9%
E
H
M d2
M d1
500
Money
($ Billions)
6
10
(c)
Real GDP
($ Trillions)
Price
Level
H
140
E
100
AD
6
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
10
Real GDP
($ Trillions)
3
(a)
Figure 3
A Spending Shock
Shifts the AD Curve
Real
Aggregate
Expenditure
($ Trillions)
AE 2
AE 1
H
E
10
13.5
Real GDP
($ Trillions)
(b)
Price
Level
100
H
E
AD 1 AD 2
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
10
13.5
Real GDP
($ Trillions)
4
Figure 4
Effects of
Key Changes on
the Aggregate
Demand Curve
(a)
Price
Level
Price level
moves us leftward
along the AD curve
P3
Price level
moves us rightward
along the AD curve
P1
P2
AD
Q3
(b)
Price
Level
Entire AD curve
shifts rightward if:
• A, Ip, G, or NX increases
• Taxes decrease
• The money supply
increases
AD 2
AD 1
Price
Level
Q2
Real GDP
(c)
Entire AD curve
shifts leftward if:
• A, I p, G, or NX decreases
• Taxes increase
• The money supply
decreases
AD 1
AD 2
Real GDP
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
Q1
Real GDP
5
Figure 5 The Aggregate Supply Curve
Price
Level
AS
130
B
100
80
A
C
6
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
10
13.5
Real GDP
($ Trillions)
6
Figure 6 Shifts of the Aggregate Supply Curve
Price
Level
AS 2
140
L
100
A
10
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
AS1
Real GDP
($ Trillions)
7
Figure 7
Effects of
Key Changes on
the Aggregate
Supply Curve
(a)
Price
Level
AS
Real GDP
moves us rightward
along the AS curve
P2
Real GDP
moves us leftward
along the AS curve
P1
P3
Q3
Q1
(b)
Price
Level
AS1
Real GDP
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
Real GDP
(c)
AS2
Entire AS curve
shifts upward if
unit costs for any
reason besides an
increase in real GDP
Q2
Price
Level
AS1
Entire AS curve
shifts downward if
unit costs for any
reason besides a
decrease in real GDP
AS2
Real GDP
8
Figure 8 Short-Run Macroeconomic Equilibrium
Price
Level
AS
B
140
E
100
F
AD
6
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
10
14
Real GDP
($ Trillions)
9
Figure 9 The Effect of a Demand Shock
Price
Level
AS
130
H
100
J
E
AD1
10 12 13.5
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
AD2
Real GDP
($ Trillions)
10
Figure 10 The Long-Run Adjustment Process
Price
Level
Long-Run AS Curve
AS2
AS1
P4
K
J
P3
P2
P1
H
E
AD2
AD1
YFEY3 Y2
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
Real GDP
11
Figure 11 Long-Run Adjustment After a Negative
Demand Shock
Price
Level
Long-Run AS Curve
AS1
AS2
P1
P2
E
N
P3
M
AD1
AD2
Y2 YFE
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
Real GDP
12
Figure 12 The Effect of a Supply Shock
Price
Level
Long-Run AS Curve
AS2
AS1
P2
P1
R
E
AD
Y2 YFE
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
Real GDP
13
Figure 12 The Effect of a Supply Shock
Price
Level
Long-Run AS Curve
AS1
E
P1
AD
YFE
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
Real GDP
14
Figure 13 The Price of Oil, Real GDP, and the Price Level,
1990–92
(a)
(b)
Price $30
of Oil
($/Barrel)
Real GDP $6.4
($ Trillions)
6.3
20
6.2
6.1
10
6.0
1990:1
1991:1
1992:1
Year and
Quarter
1990:1
1991:1
(c)
1992:1
Year and
Quarter
CPI 150
140
130
120
1990:1
ECONOMICS 2e / HALL & LIEBERMAN
CHAPTER 26 / AGGREGATE DEMAND AND AGGREGATE SUPPLY
© 2001 South-Western
1991:1
1992:1
Year and
Quarter
15