Chapter

Aggregate Demand and

Aggregate Supply
 Chapter objectives
• The model of aggregate demand and aggregate supply
• How does the model of aggregate demand and
aggregate supply explain economic fluctuations?

2
1. Introduction
• Economic activity fluctuates from year to year
– Expansion: period of rising production of goods and
services and falling unemployment
– Recession: period of falling production of goods and
services and rising unemployment

• Short-run economic fluctuations are often called

business cycles. Economic Business
cycle
activity

Time 3
1. Introduction
• Most economists use the model of
aggregate demand and aggregate supply
to study fluctuations.

4
2. The Model of Aggregate Demand and Aggregate
Supply
P
The price
level
SRAS
“Short-Run
The model P1 Aggregate
determines the Supply”
eq’m price level
AD “Aggregate
Demand”
and eq’m output Y
(real GDP). Y1
The
quantity of output
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2.1 Aggregate Demand curve (AD)
• Recall, AD curve shows the quantity of all g&s
demanded in the economy at any given price
level.
• The AD curve slopes downward for three
reasons:
– The wealth effect
– The interest-rate effect
– The exchange-rate effect

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The AD Curve
P

P2

P1
AD

Y
Y2 Y1

7
 The AD Curve
Any event that changes C,
I, G, or NX P
– except a change in P –
will shift the AD curve.

P1

AD2
AD1
Y
Y1 Y2

8
2.2 Aggregate-Supply curve (AS)
AS curve shows the P LRAS
total quantity of g&s
firms produce and sell SRAS
at any given price level.

AS curve is:
▪ upward-sloping
in short run
▪ vertical in Y
long run

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a. The Long-Run Aggregate-Supply Curve (LRAS)

The natural rate of P LRAS

output (YN) is the
amount of output
that an economy
achieves in the long
run.
YN is also called
potential output or
full-employment output. Y
YN

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 Why LRAS Is Vertical
YN determined by the P LRAS
economy’s stocks of
labor, capital, natural
resources, and on the
level of technology. P2
An increase in P
P1
does not affect
any of these,
so it does not
affect YN. Y
YN

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 Why the LRAS Curve Might Shift
Any event that changes P LRAS1 LRAS2
any of the determinants
of YN will shift LRAS.
Example: Immigration
… L,
causing YN to …, the
LRAS curve shifts…

Y
YN Y’N

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b. Short Run Aggregate Supply (SRAS) curve
The SRAS curve P
is upward sloping:
an increase in P SRAS
causes an increase P2
in the quantity of
g & s supplied.
P1

Y
Y1 Y2

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Why the Aggregate-Supply Curve Slopes Upward in the
Short Run
• Three Theories:
– The Sticky-Wage Theory
– The Sticky-Price Theory
– The Misperceptions Theory

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 The Sticky-Wage Theory
– Nominal wages are slow to adjust to changing
economic conditions, or are “sticky” in the short run
– Firms and workers set the nominal wage in
advance based on PE, the price level they
expect to prevail.
– If P > PE, revenue is higher, but labor cost is not.
Production is more profitable, so firms increase
output and employment.
– Hence, higher P causes higher Y,
so the SRAS curve slopes upward.

15
 The Sticky-Wage Theory
• The theory suggests that output deviates in
the short run from the natural rate when the
actual price level deviates from the price
level that people had expected to prevail.

Quantity Natural Actual Expected

of output = rate of + a price - price level
supplied output level

equation of AS: Y= Yn + a(P-Pe)

Y: actual output
Yn: sản lg tự nhiên
P: giá thực tế
Pe: giá kì vọng

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 Why the SRAS Curve Might Shift
1. Factors of production that shifts LRAS shifts
SRAS, too.
2. PE shifts SRAS higher

If PE rises, workers & firms set … wages,

cost of production … , Y …, SRAS shifts ...
higher
leftward

decreases

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 Question
Explain whether each of the following events
shifts SRAS curve, LRAS curve or AD curve.
a. A recession overseas causes foreigners to buy
fewer U.S. goods
b. A technological improvement raises
productivity
c. Increased job opportunities overseas cause
many people to leave the country
d. The Federal Reserve sells bonds in the open
market
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2.3 Equilibrium in the AS-AD model
a. The Short-Run Equilibrium
lưu ý không được viết sang mô hình vi mô:
+ P: price level - dùng CPI hoặc GDP deflator
+Y: giá trị của sản lượng - value - real GDP # Q P
điểm cân bằng ngắn hạn đạt được khi đường cung ngắn hạn
giao với đường cầu AD
SRAS
từ điểm cân bằng xác định được giá và sản lượng cân bằng

1 điểm quan trọng của mô hình là adjustment của mô hình

P1
The model
determines the
eq’m price level AD
Ex: Tại sao
+P2 > P1 thì ko phải điểm cân bằng
+P3<P1 thì ko phải điểm cân bằng
Y
Y 1
Vì ở P2 thì supply lớn hơn (larger) demand - surplus of g&s - lower/decrease price to push up the demand
xuống P3 thì demand> supply - shortage - công ty tăng giá để có lợi (take advantage) cho họ

* cứ khi lệch khỏi điểm cân bằng thì luôn tự điều chỉnh
and eq’m output
-> trong ngắn hạn mô hình luôn ở điểm cân bằng
(real GDP).
19 19
1 câu trong bài cuối kì chắc chắn có câu điều chỉnh về điểm cân bằng của các mô hình đã học: money market/ AS-AD
2.3 Equilibrium in the AS-AD model
b. The Long-Run Equilibrium
c1: mankiw:
LRAS
P
-trong dài hạn - giá thực tế bắt kịp giá kì vọng - vì sau nhiều kì vọng sau thì đoán được giá thực tế- kì vọng đúng
khi đó p= pe và y =yn
- điểm cân bằng trong dài hạn, LRAS giao AD tại A, gióng sang thì P=Pe và Y=Yn
+ giá thực tế luôn là giao của SRAD và AD
+vì thế nên SRAS phải qua A
SRAS
C2: của cô
SRAS và AD giao tại Y và P
+ trong dài hạn thì Y=Yn và P = Pe
+ nên đường LRAS phải đi qua điểm cân bằng A vì LRAS luôn đi qua Yn

P1

AD
Y
Y=YN

20 19
3. How the AS–AD model is used to analyze economic fluctuations

•Two causes of economic fluctuations: shifts in AD

curve and shifts in SRAS curve.
•To keep things simple, we assume that the
economy begins in the long run equilibrium.
* tìm về những sự kiện kinh tế gần đây

biến động kinh tế: economic fluctuations: là những yếu tố làm thay đổi đường AD hoặc AS hoặc cả 2
+ nếu thay đổi cả 2 thì phải xét 3 trường hợp

21 19
3. How the AS–AD model is used to analyze economic fluctuations

• Four steps for analyzing economic fluctuations:

1. Determine whether the event shifts AD or SRAS (left or
right)
2. Use AD-AS diagram to see how the shift changes Y and P in
the short run.
3. Use AD-AS diagram to see how policymakers take actions to
stabilize the economy
4. Use AD-AS diagram to see how economy moves from new
SR eq’m to new LR eq’m if policymakers do nothing

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3.1 The Effects of a Shift in AD (Demand shock)
cú sốc cầu bất lợi

• Negative demand shock – AD curve shifts

to the left
• Positive demand shock – AD curve shifts to
cú sốc cầu có lợi

the right

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a. Negative demand shock
thị trường chứng khoán sự đổ -

Event: Stock market crash

wealth decreases - consumption decreases

Step 1: Affects ..., AD P LRAS

decreases

C …, so … shifts … AD leftward SRAS1

P1 A

Step 2: SR eq’m at .... B

AD1
P and Y are …, lower

… is higher Y
unemployment rate
YN

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a. Negative demand shock
Step 3: Policymakers respond to a negative demand shock
have to implement fiscal policy or monetary policy to increase AD
AD2 has to shift to the right and shift back toward AD1, nền kte quay về P LRAS
điểm cân bằng 2

SRAS1

P1 A

AD1

Y
YN

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 Mankiw nói về assessment của price ( khá dễ với cú sốc cầu) nhưng khó với cú sốc cung - nên cô dạy cách nhìn từ Y

a. Negative demand shock

Step 4: Over time, …
unemployment causes wages
to …, P LRAS
SRAS shifts …,
until LR eq’m at .... SRAS1
Y and unemp back
at initial levels.
P1 A
Y giảm - unemployment rate increases - wages giảm ( công ty làm để có lợi cho mình)
-cost of production giảm - production tăng - SRAS shift rightward

nếu không hành động thì chỉ có Y về vị trí cũ còn P sẽ vẫn tiếp tục giảm

AD1

Y
YN

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b. Positive demand shock
Event: Stock market boom
Step 1: shift AD rightward

Step 2:

Step 3:

Step 4:
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 Summary
Demand AD curve Output Price level Policy of
shock shift to (inflation) government

Negative Left Decline (short Fall Shift AD to the

run) (short run) right
Unchanged (long Fall further
run) (long run)

Positive Right Rise (short run) Increase (short Shift AD to the

Unchanged (long run) left
run) Increase further
(long run)

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3.2 The Effects of a Shift in AS (Supply shock)
• Negative supply shock – SRAS curve shifts to the
left
• Positive supply shock – SRAS curve shifts to the
right

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a. Negative supply shock
Event: Oil price rises
Step 1: Increases ...., P LRAS
shifts …
(assume LRAS
constant) SRAS1

P1 A
Step 2: SR eq’m at ....
P is …, Y is …,
AD1
unemp is …(stagflation)
Y
YN

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 a. Negative supply shock
Step3: Policymakers respond to a negative supply shock
P
LRAS

SRAS1

P1

AD1

YN Y

Policymakers have 2 choices:

(1) decrease AD → shift AD to the left → keep P unchanged but Y
declines further
(2) increase AD (accommodating the AS shift) → shift AD to the
right → keep Y unchanged but Y rises further 31
a. Negative supply shock

Step 4:........unemployment P LRAS

causes wages to …, SRAS
shifts …,
until LR eq’m at …. SRAS1

P1 A

AD1
Y
YN

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b. Positive supply shock
•Event: Oil price falls
Step 1:

Step 2:

Step 3:

Step 4:
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 Summary

Supply SRAS Output Price level Policy of government

shock curve (inflation)
shift to

Negative left Decline Rise (1) Increase AD so that Y unchanged but

(short run) (short run) P increases further
Unchanged Unchanged (2) Decrease AD so that P unchanged but
(long run) (long run) Y decreases further

Positive right Rise Decline (1) Increase AD so that P unchanged but

(short run) (short run) Y increases further
Unchanged Unchanged (2) Decrease AD so that Y unchanged but
(long run) (long run) P decreases further

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 CONCLUSION
• This chapter has introduced the model of
aggregate demand and aggregate supply,
which helps explain economic fluctuations.
• According to this model, the output of goods
and services and the overall level of prices
adjust to balance aggregate demand and
aggregate supply

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