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Aggregate - Demand & Aggregate Supply
Aggregate - Demand & Aggregate Supply
Aggregate - Demand & Aggregate Supply
and Aggregate
33
Supply
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.
• Why the Aggregate-Supply Curve Slopes Upward in
the Short Run?
• In the short run, an increase in the overall level of
prices in the economy tends to raise the quantity of
goods and services supplied.
• A decrease in the level of prices tends to reduce the
quantity of goods and services supplied.
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
supply
P2
2. . . . does not affect
1. A change the quantity of goods
in the price and services supplied
level . . . in the long run.
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
1. Shifts in Aggregate Demand:
• In the short run, shifts in aggregate demand cause
fluctuations in the economy’s output of goods and services.
• In the long run, shifts in aggregate demand affect the overall
price level but do not affect output.
2. An Adverse Shift in Aggregate Supply:
• A decrease in one of the determinants of aggregate
supply shifts the curve to the left:
• Output falls below the natural rate of employment.
• Unemployment rises.
• The price level rises.
PE
Aggregate
Demand
QE Quantity of Output
Copyright © 2004 South-Western
A Decrease in Aggregate Demand
Price Aggregate
Level Supply
PE
Aggregate
Demand
QE Quantity of Output
Copyright © 2004 South-Western
A Decrease in Aggregate Demand
Price Aggregate
Level Supply
PE
Aggregate
Demand
QE Quantity of Output
Copyright © 2004 South-Western
The Effects of a Shift in Aggregate Supply
PE
Aggregate
Demand
QE Quantity of Output
Copyright © 2004 South-Western
A Decrease in Aggregate Supply
Price Aggregate
Level Supply
PE
Aggregate
Demand
QE Quantity of Output
Copyright © 2004 South-Western
A Decrease in Aggregate Supply
Price Aggregate
Level Supply
PE
Aggregate
Demand
QE Quantity of Output
Copyright © 2004 South-Western
Figure 9 An Adverse Shift in Aggregate Supply
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