Shifters of Aggregate Demand
AD = C + I + G + X
Change in Consumer Spending
Change in Investment Spending
Change in Government Spending
Net EXport Spending
Shifters of Aggregate Supply
AS = R + A + P
Change in
Change in
Change in
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Resource Prices
Actions of the Government
Productivity
1
Use the AD and AS model to show an
economy at full employment output
Price
Level
LRAS
AS
PLe
AD
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GDPR
2
The economy can only be in one of
three places at any time
Capital Goods
Max Capacity
0% Unemployment
Real
GDP
Real
GDP
Consumer Goods
Full Employment
5% Unemployment
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Time
Recessionary Gap
Full Employment
Inflationary Gap
3
Inflationary Gap
Output is high and unemployment is less than NRU
LRAS
Price
Level
AS
Actual GDP
above potential
GDP
PL1
AD1
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GDPR
4
Recessionary Gap
Output low and unemployment is more than NRU
LRAS
Price
Level
AS
Actual GDP
below potential
GDP
PL1
AD1
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Q1
QY
GDPR
5
Example: If there is a negative “supply shock”
of oil. What happens to PL and Output?
Price
Level
LRAS
AS1
AS
Stagflation
PL1
Stagnate Economy
+ Inflation
PLe
Still considered
recessionary gap
AD
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6
What Happens In
the Long-Run?
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7
If consumer spending increases, what will
happen in the short-run and in the long-run?
In the long-run, wages and costs increase
LRAS
AS1
Real
GDP
Price
Level
AS
PL2
Real
GDP
PL1
PLe
AD AD1
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GDPR
Time
8
If consumer spending decreases, what will
happen in the short-run and in the long-run?
In the long-run, wages & costs eventually decrease
LRAS
Price
Level
AS
Real
GDP
AS2
PLe
PL1
Real
GDP
PL2
AD2 AD
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Time
9
Economic Growth
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If investment increases, what happens in the
short-run and long-run?
Capital Stock- Machinery and tools purchased by
businesses that increase their output
LRAS LRAS1
AS AS1
PL1
PLe
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AD1
AD
Q1 QY1 GDPR
Capital Goods
Price
Level
The PPC shifts outward since
producers can make more
Consumer Goods
11
An increase in consumption or government
spending doesn’t cause economic growth.
Only Investment causes growth since firms
increase their capital stock
LRAS1
AS1
Capital Goods
Price
Level
PLe
AD1
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GDPR
Consumer Goods
12