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Aggregate Demand
Aggregate Demand
Billions of
1996 Dollars
$10,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1965 1970 1975 1980 1985 1990 1995 2000
Billions of
1996 Dollars
$1,800
1,600
1,000
800
600
400
200
1965 1970 1975 1980 1985 1990 1995 2000
Percent of
Labor Force
12
10
8 Unemployment rate
0
1965 1970 1975 1980 1985 1990 1995 2000
Price
Level
Aggregate
supply
Equilibrium
price level
Aggregate
demand
0 Equilibrium Quantity of
output Output
Price
Level
P2
1. A decrease
Aggregate
in the price
demand
level . . .
0 Y Y2 Quantity of
Output
2. . . . increases the quantity of
goods and services demanded.
P1
D2
Aggregate
demand, D1
0 Y1 Y2 Quantity of
Output
Copyright 2004 South-Western
THE AGGREGATE-SUPPLY
CURVE
In the long run, the aggregate-supply curve is
vertical.
In the short run, the aggregate-supply curve is
upward sloping.
Price
Level
Long-run
aggregate
supply
P2
2. . . . does not affect
1. A change the quantity of goods
in the price and services supplied
level . . . in the long run.
AD1980
Price
Level
Short-run
aggregate
supply
P2
1. A decrease 2. . . . reduces the quantity
in the price of goods and services
level . . . supplied in the short run.
0 Y2 Y Quantity of
Output
Price
Level
Long-run
aggregate
Short-run
supply
aggregate
supply
Equilibrium A
price
Aggregate
demand
0 Natural rate Quantity of
of output Output
3. . . . but over
time, the short-run
P A aggregate-supply
curve shifts . . .
P2 B
1. A decrease in
aggregate demand . . .
P3 C
Aggregate
demand, AD
AD2
0 Y2 Y Quantity of
4. . . . and output returns Output
to its natural rate.
Copyright 2004 South-Western
TWO CAUSES OF ECONOMIC
FLUCTUATIONS
Shifts in Aggregate Demand
In the short run, shifts in aggregate demand cause
fluctuations in the economys output of goods and
services.
In the long run, shifts in aggregate demand affect
the overall price level but do not affect output.
Long-run Short-run
aggregate AS2 aggregate
supply supply, AS
B
P2
A
P
3. . . . and
the price
level to rise.
Aggregate demand
0 Y2 Y Quantity of
2. . . . causes output to fall . . . Output
Stagflation
Adverse shifts in aggregate supply cause
stagflationa period of recession and inflation.
Output falls and prices rise.
Policymakers who can influence aggregate demand
cannot offset both of these adverse effects
simultaneously.
P3 C 2. . . . policymakers can
P2 accommodate the shift
A by expanding aggregate
3. . . . which P demand . . .
causes the
price level
to rise 4. . . . but keeps output AD2
further . . . at its natural rate.
Aggregate demand, AD