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Chapter 11: Aggregate Demand (AD) and Aggregate Supply (AS) Alomar_111_15 1 What is demand? AD: a curve that shows the amount of outputs that buyers want to purchase at each possible price. The relationship between quantity demanded and the price level is negative: an increase in aggregate price level reduces quantity demanded. Alomar_111_15 2 The AD deals with all goods and services that are produced in the economy in a given year. AD = C + I + G + Xn This is a GDP demand Alomar_111_15 3 The AD Curve P AD Q=GDP Alomar_111_15 4 Changes in Price Level: Leads to move along the AD curve: An increase in (P) leads to a decrease in Qd A decrease in (P) leads to an increase in Qd This is the only factor that leads to a move along the AD curve. Alomar_111_15 5 Determinants of AD: Any change in these factors leads to a shift in the AD upward or downward. Recall that AD = C + I + G + Xn Therefore, any change in these components will leads to a change in AD Alomar_111_15 6 1. A. B. C. D. Consumer Spending (C): Consumer wealth Consumer expectations Debt Taxes Alomar_111_15 7 A. B. C. D. E. 2. Investment Spending (I): Real interest rate Expected return Expectations Technology Inventories Alomar_111_15 8 3. Government Spending (G): 4. Net Exports (Xn) Alomar_111_15 9 The AD Curve P AD Q=GDP Alomar_111_15 10 Aggregate Supply (AS) What is supply? a schedule or curve that shows the amount of outputs that firms willing to produce at each possible price. The relationship between quantity supplied and the price level is positive: an increase in aggregate price level increases quantity supplied Alomar_111_15 11 The AS shows all goods and services that are produced in the economy in a given year. This is a GDP supply Alomar_111_15 12 AS Curve P AS Q=GDP Alomar_111_15 13 Changes in Price Level Leads to move along the AS curve: An increase in (P) leads to an increase in Qs A decrease in (P) leads to a decrease in Qs This is the only factor that leads to a move along the As curve. Alomar_111_15 14 Determinants of AS 1. 2. 3. 4. Input prices Taxes and subsidies Technology Government regulations Alomar_111_15 15 The Equilibrium P AD AS Q=GDP Alomar_111_15 16 AS in the short and Long Run Short-run: when at least one production factor is constant (cannot be changed) Long-run: when all production factors are variable (can be changed) This will give up two different AS curves Alomar_111_15 17 In the (SR), since some factors are constant, we cannot reach our full production capacity, the AS curve is positively slopped. In the (LR), since all factors are variable, we assume that we reached our full production capacity, the AS curve is vertical. Alomar_111_15 18 AS Curve P LRAS SRAS FE Q=GDP Alomar_111_15 19 The Equilibrium: AS = AD P AD AD FE Q=GDP Alomar_111_15 20