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Aggregate
Demand and
Supply Analysis
Aggregate Demand
The relationship between the quantity
of aggregate output demanded and the
price level when all other variables are
held constant.
Aggregate demand is made up of four
component parts
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Y ad C I G NX
The aggregate demand curve is downward sloping because
P M / P i I Y ad
and
P M / P i E NX Y ad
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22-4
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Summary
Table 1
Factors That
Shift the
Aggregate
Demand Curve
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Aggregate Supply
Long-run aggregate supply curve
Determined by amount of capital and labor and
the available technology
Vertical at the natural rate of output generated by
the natural rate of unemployment
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22-9
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22-12
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22-14
Self-Correcting Mechanism
Regardless of where output is initially,
it returns eventually to the natural rate
Slow
Wages are inflexible, particularly downward
Need for active government policy
Rapid
Wages and prices are flexible
Less need for government intervention
22-15
22-16
22-17
Hysteresis
Departure from full employment levels as a result of past
high unemployment
Natural rate of unemployment shifts upward and natural
rate of output falls below full employment
Expansionary policy needed to shift aggregate demand
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Conclusions
Shift in aggregate demand affects output only in the
short run and has no effect in the long run
Shifts in aggregate demand affects only price level
in the long run
Shift in short run aggregate supply affects output
and price only in the short run and has no effect in
the long run (holding the aggregate demand
constant)
The economy has a self-correcting mechanism
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22-20
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22-23
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