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Gross domestic product
The business cycle
The U.S. economic record
Aggregate demand curve
Aggregate supply curve
Equilibrium GDP and price level
John Maynard Keynes. The General
Theory of Employment, Interest, and
Money, 1936.
The macroeconomic problem: Persistent
underutilization of resources or “poverty in the
midst of plenty.”
Stock variables are cumulated
values measured at a specific
point in time.
Examples: Bank balances, debt,
inventories.
Flow variables are measured
per unit point in time.
Examples: Income (including
profits), output.
The market value of new goods and services
produced within the nation’s border within
one year.
GDP is our basic measure
of aggregate (total)
economic activity
Wave-like movement of aggregate
economic activity over time.
• Business cycles are irregularly recurring
• A full cycle consists of an expansion and a
contraction (recession).
Hypothetical business cycles
7
Annual percentage change, US real GDP since 1929
8
US and UK annual growth rates in output are
similar
9
Price level (2000 = 100)
Aggregate demand curve
The quantity of aggregate output
demanded is inversely related to
the price level, other things
constant.
This inverse relationship is
reflected by the aggregate
demand curve AD.
150
100
50
0
AD
Real GDP
2 4 6 8 10 12 14 16
(trillions of 2000 dollars)
10
Let M denote money balances and P is the
price level. Real money balances (RB) are
given by:
M
RB 
P
As the price level rises, my money
loses its buying power. Thus I will buy
less.
Price Level
AS
A curve representing
the relationship
between the economy’s
price level and real GDP
supplied per time
period, other things
constant.
0
Real GDP
Aggregate Demand and Supply in 2006
Price level (2000 = 100)
AS
The total output of the economy
and its price level are determined
at the intersection of the Ad and
AS curves.
This point reflects real GDP and
the price level for 2006 using
2000 as the base year.
150
116.6
50
0
AD
Real GDP
11.3
(trillions of 2000 dollars)
13
The decrease in AD from 1929 to 1933
Price level (2000 = 100)
AS
12.0
8.9
AD1929
The Great Depression of the
1930s can be represented by the
shift to the left of the AD curve,
from AD1929 to AD1933.
In the resulting depression, real
GDP fell from $865 billion to $636
billion, and the price level
dropped from 11.9 to 8.9,
measured relative to a price level
of 100 in the base year 2000.
AD1933
0
Real GDP
636 865
(billions of 2000 dollars)
14
•Word is a conflation of “stagnation” and
“inflation.”
•Stagnation means stagnant or negative
growth of output and jobs.
•Inflations means a sustained increase in
the cost-of-living.
Stagflation from 1973 to 1975
Price level (2000 = 100)
AS1975
AS1973
38.0
31.9
AD
0
4.31
Real GDP
4.34
(trillions of 2000 dollars)
The stagflation of the mid-1970s
can be represented as a leftward
shift of the AS curve from AS1973 to
AS1975.
Aggregate output fell from $4.34
trillion in 1973 to $4.31 trillion in
1975, for a decline of about $30
billion (stagnation).
The price level rose from 31.9 to
38.0, for a growth of 19%
(inflation).
Tracking US real GDP and price level since 1929
17