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Aggregate Supply
Dr Pinki Shah
What is Aggregate Demand
Aggregate demand is the relationship between
the quantity of real GDP demanded and the
price level.
• It represents the amount of goods and
services that consumers, businesses,
government and foreign buyers are willing
and able to buy at various price levels
• AD= C+I+G+(X-M)
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Aggregate Demand curve
140
e'
130
Price level
d'
120
c'
110
b'
100
e'
90
AD
6.0 6.5 7.0 7.5 8.0
Real GDP (trillions of 1992 dollars)
What can cause a shift in the
Aggregate Demand Curve?
Consumption, investments,
government spending and
net exports
5
Changes in Aggregate Demand
140
Increase in
130 aggregate
Price level
demand
120
110
100
Decrease in AD1
90 aggregate
demand
AD2 AD0
6.0 6.5 7.0 7.5 8.0
Real GDP (trillions of 1992
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Aggregate Supply Curve?
The curve that shows the level of real GDP
produced at different price levels during a time
period, ceteris paribus
or
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Shift in the short run AS curve
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Long run AS curve
• Long run AS curve
Long run AS is the output, which firms
would produce after the price level and
factor prices have fully adjusted after
any shift in AD.
• Keynesian often illustrate the LRAS curve as
perfectly elastic at low level of output, then upward
sloping over a range of output, and finally perfectly
inelastic. Their view is that in the long run the
economy can operate at any level of output and not
necessarily at its full capacity.
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Long run AS curve
• New classical economist illustrate that
LRAS curve as a vertical line because that
believe that, in long run, the economy will
operate at full capacity.
• But both agree that factors, which will shift the
vertical part of the LRAS curve, are the changes in
the quantity and quality of resources, as these will
affect the productive capacity of the country.
The AS curve shows the level of total output in the
whole economy at any given level of average prices.
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Aggregate Supply Fundamentals
• The quantity of real GDP supplied (Y) depends
upon:
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• Aggregate demand and aggregate supply
analysis determines the equilibrium price level
and the equilibrium real GDP by the
intersection of the aggregate demand and the
aggregate supply curves.
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Long-Run Equilibrium
• The intersection of the
Long-run
aggregate demand Price
aggregate
curve and the long-run Level supply Short-run
aggregate
aggregate supply curve supply
determines the
economy’s equilibrium
output and price level.
• At long-run
Equilibr
equilibrium: ium
A
– Output is at its price
natural rate.
– The short-run
aggregate supply
Aggregate
curve also passes demand
through the point of
intersection. 0 Natural Quantity of
rate Output
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of output