Aggregate Demand & Supply
Aggregate Demand
__________________- “added all together” When we use aggregates we combine all prices and all quantities.
Aggregate Demand is all the ____________ ____________ ______________________ (real GDP) that buyers are willing
and able to purchase at different price _____________________________. aka- The Demand for everything by
everyone in the.
There is an ______________________ relationship between price level and Real GDP. If the price level: Increases
(Inflation), then ____________ ____________________ demanded falls.
______________________ (deflation), the real GDP demanded increases.
Draw & Label AD Curve Here:
AD is the demand by consumers, businesses, government, and foreign
countries. AD = GDP = C + I + G + Xn
What does not shift this curve? _________________
3 Reasons for the Downward Slope
1. The Wealth Effect- Higher price levels reduce the ______________ ___________________ of money. This
decreases the quantity of expenditures. Lower price levels increase purchasing power and increase expenditures
Example: If the price level doubles, people are going to buy less stuff because they have less purchasing power.
So…price level goes up, GDP demanded goes _____________________.
2. Interest-Rate Effect- When the price level increases, lenders need to charge ________________ interest rates to
get a REAL return on their loans. Higher interest rates discourage consumer spending and business investment.
Example: An increase in prices leads to an increase in the interest rate from 5% to 25%. You are less likely to take
out loans to improve your business.
So…price level goes up, GDP demanded goes __________________.
3. Foreign Trade Effect- When U.S. price level rises, foreign buyers purchase ________________ U.S. goods and
Americans buy more _________________ goods. Exports fall and imports rise causing real GDP demanded to
fall. (XN Decreases)
Example: If prices triple in the US, Canada will no longer buy US goods causing quantity demanded of US
products to fall. So…price level goes up, GDP demanded goes _________________________
4 Shifters of Aggregate Demand
An increase in spending shift AD __________________________, and decrease in spending shifts it left
1. Change in Consumer Spending- Increase in Disposable Income (Higher incomes…), Consumer Expectations
(People fear a recession…), ________________ (Decrease in income taxes…)
2. Change in Investment Spending- Real Interest Rates (Price of borrowing $), Future Business Expectations (High
expectations…), Productivity and Technology (New robots…), Business Taxes (Higher corporate taxes means…)
3. Change in Government Spending- Government Expenditures (Decrease in defense spending…)
4. Change in Net Exports (X-M)- _____________________ Rates (If the us dollar depreciates relative to the euro…)
Aggregate Supply
Aggregate Supply is the amount of goods and services (real GDP) that firms will _____________________ in an economy
at different price levels. The supply for everything by all firms.
Aggregate Supply differentiates between short run and long-run and has two different curves.
Short-run Aggregate Supply- _______________ and Resource Prices will not increase as price levels increase.
Long-run Aggregate Supply-Wages and ________________ Prices will increase as price levels increase.
Draw & Label Short Run AS Here:
Draw & Label Long Run AS Here:
3 Shifters of Aggregate Supply
An increase in national ___________________will shift the curve to the right, a decrease will shift the curve to the left.
1. Change in_________________________________ Prices- Prices of Domestic and Imported Resources (Increase
in price of Canadian lumber…), Supply Shocks (sudden change in supply), Inflationary Expectations (If people
expect higher prices in the future…)
2. Change in _____________________________ of the Government (NOT Government Spending)- Taxes on
Producers (Lower corporate taxes…), Subsidies for Domestic Producers (Lower subsidies for domestic farmers…)
Government Regulations (EPA inspections required to operate a farm…)
3. Change in _________________________________- Technology (Computer virus that destroy half the
computers…), (The advent of a teleportation machine…)
Inflationary Gap- Output is high and unemployment is less than _________ _________ _______ __________________.
Recessionary Gap- Output ____________________ and unemployment is more than NRU
Stagflation- Stagnate Economy + Inflation
AD/AS Practice
The Change
AD/AS Model
The Result
1. Before: A
1. Calvin, and other children, convince
their parents to purchase more “big
ticket” items for the Holidays.
2. Shifter
3. After: B
4. Gap:
1. Before: A
2. The effect on production when a 5%
excise tax is placed on several resources.
2. Shifter
3. After: B
4. Gap:
1. Before: A
2. Shifter
3. A large purchase of U.S. wheat by
Russia
3. After: B
4. Gap:
1. Before: A
2. Shifter
4. A cut in Federal spending for Health
Care
3. After: B
4. Gap:
1. Before: A
2. Shifter
5. The complete disintegration of OPEC
causing oil prices to fall
3. After: B
4. Gap:
1. Before: A
2. Shifter
6. A 10% decrease in personal income tax
rates
3. After: B
4. Gap:
HW
1. Note card terms- aggregate supply, aggregate demand, AD shifters, AS shifters
2. USA TestPrep- Log in to USATest Prep and complete the “Macroeconomics 1 Quiz” You will be allowed 2
attempts to complete this quiz.