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Chapter 9
Aggregate demand = total spending in the economy at alternative price levels. Aggregate supply = total output of the economy at alternative price levels. Changes in aggregate demand and supply cause the equilibrium price level and real GDP to change resulting in business cycles.
Domestic & Foreign Income Domestic & Foreign Prices Exchange Rates Government Policy
Investment
Wealth Effect
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Test question
A decrease in the foreign price level relative to the domestic price level will result in
A leftward shift of the domestic aggregate demand curve. A rightward shift of the domestic aggregate demand curve.
Demand-pull inflation: rapid increases in AD outpace the growth of AS, causing price level increases (inflation).
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Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves. It shows the quantity of real GDP produced at different price levels. Short-run AS slopes upward because an increase in the price level (while production costs and capital are held constant on the short-run), means higher profit marginsfirms will want to produce more.
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Aggregate Supply
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The amount of capital is not fixedfirms can build new plants and buy new equipment over the long-run. In the long-run, AS is set by the production possibilities curvethe capacity of the economy, and is not affected by prices, hence is vertical.
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