15 Aggregate

Demand &
Aggregate Supply
Aggregate
Demand
 Aggregate demand represents the
sum of consumption (C), investment
(IG), government expenditures (G),
and net export (XN).

AD= C + Ig + G + Xn
 Aggregate Demand

Price level
Why is the aggregate
Unlike demand function an
demand, inverse function
aggregate between the price level
demand and output?
includes
all prices
so we call
it price
level.

AD

Real GDP
 Three factors that affect
aggregate demand:
• Interest-rate effect
• Wealth effect
• Net Export effect
These three combine to produce a
downward sloping aggregate demand
curve. There are different reasons
than those that create a downward
sloping demand curve for a single
Shifts in Aggregate Demand
An increase in expected future
income, in government

Price level
expenditures or in the money
supply, or a decrease in taxes will
cause the AD to shift from AD to
AD3.

A decrease in
expected future
income, in
government
expenditures, in
the money supply
AD3
or an increase in AD1
taxes will cause AD2
the AD to shift
from AD to AD2. Real GDP
AD = C + Ig + G + Xn
 For each situation described below,
determine if the event will increase or
decrease AD.
1. Congress cuts taxes.
2. Survey shows business investment spending
decreased last month.
3. Government spending to increase next fiscal year;
President promises no increase in taxes.
4. Survey shows consumers are confident about
future economy.
5. Business leaders feel economy is headed for
recession.
Aggregate
Supply
 Why does the aggregate supply
curve have three distinct ranges?
Under what
conditions would
AS be in the
vertical range?

Under what
Under what conditions would
conditions would AS be in the
AS be in the intermediate range?
horizontal
range?
 Shifts in Aggregate Supply
What can cause the
aggregate supply curve
Price level

to shift rightward, or
SRAS increase?
SRAS2
(1) the prices of inputs;
(2) productivity;
(3) technology; and
(4) government taxes,
subsidies, and
regulations.

Real GDP
 Shifts in Aggregate Supply
What can cause the
aggregate supply curve
Price level

to shift leftward, or
SRAS3
SRAS
decrease?

(1) the prices of inputs;

(2) productivity;
(3) technology; and
(4) government taxes,
subsidies, and
regulations.

Real GDP
 For each situation described below,
determine if the event will increase or
decrease SRAS.
1. Unions grow more aggressive; wage rates
increase.
2. OPEC successfully increases oil prices.
3. Labor productivity increases dramatically.
4. Giant natural gas discovery decreases energy
prices.
5. Computer technology brings new efficiency to
industry.
 What would
happen if the

Price level
initial price
level were
SRAS higher than
PLe?

PLe

AD

Ye Real GDP
What would
happen if the initial
price level were
lower than PLe?
What determines whether a shift in
aggregate demand changes output,
the price level, or both?
Long-Run Aggregate Supply (LRAS) and the
Production Possibilities Curve (PPC)
 Price level
SRAS

PLe

AD

Ye Real GDP