Aggregate Demand

Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium & Changes
in Equilibrium
11 CHAPTER

Appendix
Key Terms
Aggregate Demand
and
Aggregate Supply
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 AGGREGATE DEMAND
Aggregate Demand
Changes in AD
Defined:
Determinants of AD •Amounts of Real Output
•Buyers Collectively Desire
Aggregate Supply
Determinants of AS
Equilibrium & Changes
in Equilibrium •At Each Possible Price Level
Appendix
Key Terms
Aggregate Demand Curve
Down Sloping Due To:
•Real-Balances Effect
•Interest-Rate Effect
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•Foreign Purchases Effect
Graphically…
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 AGGREGATE DEMAND CURVE
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Price level
Equilibrium & Changes
in Equilibrium
Appendix
Key Terms

AD
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 CHANGES IN AGGREGATE DEMAND
Aggregate Demand Aggregate Demand
Changes in AD
Determinants of AD
Can Increase
Aggregate Supply
Determinants of AS
Price level
Equilibrium & Changes
in Equilibrium
Appendix
Key Terms

AD2
AD1
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 CHANGES IN AGGREGATE DEMAND
Aggregate Demand Aggregate Demand
Changes in AD
Determinants of AD
Can Increase
Aggregate Supply
Determinants of AS
Price level …or Decrease
Equilibrium & Changes
in Equilibrium
Appendix
Key Terms

AD1
AD3
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 DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
Aggregate Demand
Changes in AD
•Consumer Wealth
Determinants of AD •Consumer Expectations
Aggregate Supply
Determinants of AS
•Household Indebtedness
Equilibrium & Changes
in Equilibrium
• Taxes
Appendix Change in Investment Spending
• Real Interest Rates
Key Terms

• Expected Returns
• Expected Future Business
Conditions
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• Technology
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• Degree of Excess Capacity
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 DETERMINANTS OF AGGREGATE DEMAND
Government Spending
Aggregate Demand
Changes in AD
Determinants of AD Net Export Spending
Aggregate Supply
Determinants of AS • National Income Abroad
Equilibrium & Changes
in Equilibrium • Exchange Rates
Appendix
Key Terms

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 AGGREGATE SUPPLY
Aggregate Demand
Defined:
Changes in AD •Levels of Real Domestic
Output
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium & Changes
•At Each Possible Price
in Equilibrium
Appendix
Level
Key Terms •Long-run Supply Curve
•Wages and Resource
Prices Match Price Level
•Short-run Supply Curve
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Price Level
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 AGGREGATE SUPPLY
Aggregate Demand Long Run
Changes in AD
Determinants of AD
P ASLR
Aggregate Supply
Determinants of AS
Equilibrium & Changes Price level
in Equilibrium
Appendix
Key Terms

Long-run
Aggregate Full-Employment
Supply

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 AGGREGATE SUPPLY
Aggregate Demand Short Run
Changes in AD
P AS
Determinants of AD
Aggregate Supply
Aggregate
Determinants of AS Supply
Equilibrium & Changes
in Equilibrium
Price level Short-run
Appendix
Key Terms
Full-
Employment

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 AGGREGATE SUPPLY
Changes in Aggregate Supply
Aggregate Demand
Changes in AD
P AS3
Determinants of AD AS1
Aggregate Supply Decrease In AS2
Determinants of AS
Equilibrium & Changes
Aggregate
Supply
Price level
in Equilibrium
Appendix
Key Terms

Increase In
Aggregate
Supply
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 DETERMINANTS OF AGGREGATE SUPPLY

Aggregate Demand
Input Prices
Changes in AD
Determinants of AD
Aggregate Supply
Domestic Resource Prices
•Labor
Determinants of AS
Equilibrium & Changes
in Equilibrium
Appendix
Key Terms
•Land
•Capital
Prices of Imported Goods
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Market Power
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 DETERMINANTS OF AGGREGATE SUPPLY

Aggregate Demand Productivity

Changes in AD
Determinants of AD Total Output
Aggregate Supply
Productivity =
Determinants of AS Total Inputs
Equilibrium & Changes
in Equilibrium
Appendix
Key Terms
Legal-Institutional
Environment
• Business Taxes and
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Subsidies
• Government Regulation
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 EQUILIBRIUM AND CHANGES
Aggregate Demand
IN EQUILIBRIUM
Changes in AD P AS
Determinants of AD
Aggregate Supply
Determinants of AS
Price Level
Equilibrium & Changes
in Equilibrium
Appendix
Key Terms
Equilibrium
100 Real Output
92
a b

AD
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50

51
51

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0
4

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 INCREASES IN AD:
DEMAND-PULL INFLATION
Aggregate Demand
Changes in AD P AD1 AD2 AS
Determinants of AD
Aggregate Supply
Determinants of AS
Price Level
Equilibrium & Changes
in Equilibrium
Appendix
P2
Key Terms

P1

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 DECREASES IN AD: RECESSION
& CYCLICAL UNEMPLOYMENT
Aggregate Demand
Changes in AD P AD2 AD1 AS
Determinants of AD
Aggregate Supply
Determinants of AS
Price Level
Equilibrium & Changes
in Equilibrium
Appendix
P1
b a
Key Terms

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 DECREASES IN AD: RECESSION
& CYCLICAL UNEMPLOYMENT
Aggregate Demand
Changes in AD
Determinants of AD •Wage Contracts
•Morale, Effort, and
Aggregate Supply
Determinants of AS
Equilibrium & Changes

Productivity
in Equilibrium
Appendix
Key Terms

•Efficiency Wages
•Minimum Wage
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•Menu Costs
•Fear of Price Wars
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 DECREASES IN AS:
Aggregate Demand
COST-PUSH INFLATION
AS2
Changes in AD P AS1
Determinants of AD
Aggregate Supply
Determinants of AS
Price Level
Equilibrium & Changes
in Equilibrium
Appendix
P2 b
Key Terms

P1 a

AD1
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 INCREASES IN AS:
FULL EMPLOYMENT
Aggregate Demand
Changes in AD
…With Price-Level Stability
Determinants of AD P AS1 AS2
Aggregate Supply P3
Determinants of AS b
Equilibrium & Changes
in Equilibrium
Price Level
Appendix
P2
Key Terms
P1
a

AD2
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Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin, 2005
aggregate demand-aggregat short-run aggregate supply curv
e supply (AD-AS) model e
aggregate demand determinants of aggregate suppl
real-balances effect y
interest-rate effect productivity
foreign purchases effect equilibrium price level
determinants of aggregate d equilibrium real output
emand
aggregate supply efficiency wages
long-run aggregate supply c menu costs
urve

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 CHAPTER 11 - Appendix
Aggregate Demand
Changes in AD RELATIONSHIP OF THE AGGREGATE
Determinants of AD
DEMAND CURVE TO THE AGGREGATE
Aggregate Supply
Determinants of AS EXPENDITURES MODEL
Equilibrium & Changes
in Equilibrium

Derivation of the
Appendix
Key Terms

Aggregate Demand Curve

from the
Aggregate Expenditures Model
Illustrated…
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 DERIVATION OF THE AGGREGATE DEMAND CURVE
AE1 at P 1

Aggregate expenditures
(billions of dollars)
Aggregate Demand 1 AE2 at P 2
Changes in AD AE3 at P 3
Determinants of AD 2
Aggregate Supply
Determinants of AS 3
Equilibrium & Changes
in Equilibrium
Appendix
0
Key Terms Q3 Q2 Q1

P3
3’
Price level

The Aggregate Demand

2’
P2 Can Be Constructed
P1 1’
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 SHIFTS IN THE AGGREGATE EXPENDITURES
SCHEDULE & THE AGGREGATE DEMAND CURVE
AE2 at P 1

Aggregate expenditures
Aggregate Demand

(billions of dollars)
Changes in AD
AE1 at P 1
Determinants of AD
Aggregate Supply
Determinants of AS
Increase in
Equilibrium & Changes Aggregate
in Equilibrium
Appendix
Expenditures
Key Terms 0 Q1 Q2

Increase in
Aggregate
Price level

P1
Demand

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 SHIFTS IN THE AGGREGATE EXPENDITURES
SCHEDULE & THE AGGREGATE DEMAND CURVE
AE2 at P 1

Aggregate expenditures
Aggregate Demand

(billions of dollars)
Changes in AD
AE1 at P 1
Determinants of AD
Aggregate Supply
Determinants of AS
Increase in
Aggregate
Equilibrium & Changes
in Equilibrium

A n y Expenditures
s ?
Appendix
Key Terms 0

e s
Q1
t i on
Q2

Qu Increase in
Aggregate
Price level

P1
Demand

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AD1 Click To Return
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0 Q1 Q2
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Aggregate Demand
Changes in AD
Coming
next... FISCAL
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium & Changes

POLICY
in Equilibrium
Appendix
Key Terms

Chapter
12
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