Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
11
C HAPTE R
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Aggregate Demand
and
Aggregate Supply
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Copyright McGraw-Hill/Irwin 2002
AGGREGATE DEMAND
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Defined: The amounts of real
output that buyers
collectively desire to
purchase at each possible
price level
Aggregate Demand Curve
Down Sloping Due To:
•Real-Balances Effect
•Interest-Rate Effect
•Foreign Purchases Effect
Copyright McGraw-Hill/Irwin 2002
DERIVATION OF THE AGGREGATE DEMAND CURVE
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
AE1 at P 1
Aggregate expenditures
(billions of dollars)
Aggregate Demand
2
3
0
Changes in AD & AS
Key Terms
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Price level
Changes in
Equilibrium
Multiplier & Price
Changes
AE2 at P 2
AE3 at P 3
1
P3
GDP3 GDP2 GDP1
3’
P2
1’
P1
0
The Aggregate Demand
Can Be Constructed
2’
AD
GDP3 GDP2 GDP1
Copyright McGraw-Hill/Irwin 2002
CHANGES IN AGGREGATE DEMAND
Aggregate Demand
Aggregate Demand
Can Increase
Derivation of the AD
Curve
Changes in AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Price level
Determinants of AD
Multiplier & Price
Changes
AD2
Changes in AD & AS
Key Terms
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AD1
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Real domestic output, GDP
Copyright McGraw-Hill/Irwin 2002
CHANGES IN AGGREGATE DEMAND
Aggregate Demand
Aggregate Demand
Can Increase
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
…or Decrease
Price level
Shifts in AE Schedule
and Curve
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
AD3
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AD1
Real domestic output, GDP
Copyright McGraw-Hill/Irwin 2002
DETERMINANTS OF AGGREGATE DEMAND
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Change in Consumer Spending
• Consumer Wealth
• Consumer Expectations
• Consumer Indebtedness
• Taxes
Change in Investment Spending
• Real Interest Rates
• Expected Returns
• Expected Future Business
Conditions
• Technology
• Degree of Excess Capacity
• Business Taxes
Copyright McGraw-Hill/Irwin 2002
DETERMINANTS OF AGGREGATE DEMAND
Aggregate Demand
Government Spending
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Net Export Spending
• National Income Abroad
• Exchange Rates
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Changes in Aggregate Demand Shifts
and the Aggregate Expenditures Model
Illustrated…
Copyright McGraw-Hill/Irwin 2002
SHIFTS IN THE AGGREGATE EXPENDITURES
SCHEDULE & THE AGGREGATE DEMAND CURVE
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in AD & AS
Key Terms
Price level
Multiplier & Price
Changes
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AE1 at P 1
Increase in
Aggregate
Expenditures
0
Changes in
Equilibrium
Previous
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AE2 at P 2
Aggregate expenditures
(billions of dollars)
Aggregate Demand
GDP1
GDP2
Increase in
Aggregate
Demand
P1
Next
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AD1
0
Copyright McGraw-Hill/Irwin 2002
GDP1
GDP2
AD2
AGGREGATE SUPPLY
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Defined: The amounts of real
output that firms will produce
at each possible price level
Higher Price Levels Provide An
Incentive to Produce More
Aggregate Supply Has Three
Segments or Ranges:
1 - Horizontal Range
2 - Intermediate (Upsloping) Range
3 - Vertical Range
Copyright McGraw-Hill/Irwin 2002
AGGREGATE SUPPLY
Aggregate Demand
Derivation of the AD
Curve
P
Changes in AD
Determinants of AD
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Price level
Shifts in AE Schedule
and Curve
Vertical
Range
Horizontal
Range
Upsloping or
Intermediate
Range
Changes in AD & AS
Key Terms
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Q
Real domestic output, GDP
Copyright McGraw-Hill/Irwin 2002
AGGREGATE SUPPLY
Aggregate Demand
Derivation of the AD
Curve
P
Changes in Aggregate Supply
AS3AS1AS2
Changes in AD
Determinants of AD
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Price level
Shifts in AE Schedule
and Curve
Decrease In
Aggregate
Supply
Increase In
Aggregate
Supply
Changes in AD & AS
Key Terms
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End
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Q
Real domestic output, GDP
Copyright McGraw-Hill/Irwin 2002
DETERMINANTS OF AGGREGATE SUPPLY
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Change in Input Prices
Domestic Resource
Availability
• Land
• Labor
• Capital
• Entrepreneurial Ability
Prices of Imported Goods
Market Power
Copyright McGraw-Hill/Irwin 2002
DETERMINANTS OF AGGREGATE SUPPLY
Aggregate Demand
Derivation of the AD
Curve
Change in Productivity
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Productivity
=
Real Output
Input
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Change in Legal-Institutional
Environment
• Business Taxes and
Subsidies
• Government Regulation
Copyright McGraw-Hill/Irwin 2002
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
EQUILIBRIUM: REAL OUTPUT
AND THE PRICE LEVEL
P
AS
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Price Level
Determinants of AD
Equilibrium in the
Intermediate Range
Pe
P1
Key Terms
AD
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Q1
Qe Q2
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
Q
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
EQUILIBRIUM: REAL OUTPUT
AND THE PRICE LEVEL
P
AS
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Price Level
Determinants of AD
Equilibrium in the
Horizontal Range
Pe
Key Terms
AD
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Q1 Qe Q2
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
Q
CHANGES IN EQUILIBRIUM
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Increasing Demand in the Horizontal Range
P
AS
Determinants of AD
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
AD1
Price Level
Shifts in AE Schedule
and Curve
P1
Key Terms
AD2
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Q1
Q2
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
Q
CHANGES IN EQUILIBRIUM
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Increasing Demand in the Intermediate Range
P
AS
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Price Level
Determinants of AD
P4
P3
Key Terms
AD3 AD4
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Q3
Q4
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
Q
CHANGES IN EQUILIBRIUM
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Increasing Demand in the Vertical Range
P
AS
Determinants of AD
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
P6
Price Level
Shifts in AE Schedule
and Curve
P5
AD5 AD6
Changes in AD & AS
Key Terms
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Qc
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
Q
Aggregate Demand
Derivation of the AD
Curve
MULTIPLIER WITH
PRICE-LEVEL CHANGES
Inflation and the Multiplier
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Price Level
Determinants of AD
Shifts in AE Schedule
and Curve
AS
Full Multiplier
Effect
Changes in AD
Reduced
Multiplier
Effect Due
to Inflation
P2
AD3
P1
Key Terms
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AD1
GDP1
GDP2
AD2
GDP3
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
DECREASES IN AD AND RECESSION
Aggregate Demand
Derivation of the AD
Curve
Changes in AD
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Decreasing Demand That Causes A Recession
Recession and Cyclical Unemployment
•Wage Contracts
•Morale, Effort, and
Productivity
•Efficiency Wages
•Minimum Wage
•Menu Costs
•Fear of Price Wars
Copyright McGraw-Hill/Irwin 2002
DECREASES IN AD AND RECESSION
Aggregate Demand
Decreasing Demand That Causes A Recession
Derivation of the AD
Curve
AS
Changes in AD
Determinants of AD
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
AD2
Price Level
Shifts in AE Schedule
and Curve
P1
Key Terms
AD1
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Q2
Q1
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
DECREASES IN AD AND RECESSION
Aggregate Demand
Decreasing Supply That Causes A Recession
Derivation of the AD
Curve
AS2 AS1
Changes in AD
Determinants of AD
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
P2
Price Level
Shifts in AE Schedule
and Curve
P1
Changes in AD & AS
Key Terms
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AD
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Q2
Q1
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
INCREASES IN AS AND INFLATION
Aggregate Demand
Derivation of the AD
Curve
Increasing Supply: Full-Employment and
Price-Level Stability
AS1 AS2
Changes in AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Price Level
Determinants of AD
P3
P2
P1
Changes in AD & AS
AD2
Key Terms
AD1
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Q1
Q2
Q3
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
INCREASES IN AS AND INFLATION
Aggregate Demand
Derivation of the AD
Curve
Increasing Supply: Full-Employment and
Price-Level Stability
AS1 AS2
Changes in AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Price Level
Determinants of AD
P3
P2
P1
Chapter
Conclusions
Changes in AD & AS
AD2
Key Terms
AD1
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Q1
Q2
Q3
Real Domestic Output, GDP
Copyright McGraw-Hill/Irwin 2002
aggregate demandaggregate supply (ADAS) model
aggregate demand
real-balances effect
interest-rate effect
foreign purchases effect
determinants of aggregate
demand
aggregate supply
horizontal range (of AS
curve)
Copyright McGraw-Hill/Irwin, 2002
intermediate range (of AS
curve)
vertical range (of AS curve)
determinants of aggregate
supply
productivity
equilibrium price level
equilibrium real output
efficiency wages
menu costs
BACK
END
Aggregate Demand
Derivation of the AD
Curve
Coming next...
Changes in AD
FISCAL
POLICY
Determinants of AD
Shifts in AE Schedule
and Curve
Aggregate Supply
Equilibrium Real
Output & Price Level
Changes in
Equilibrium
Multiplier & Price
Changes
Changes in AD & AS
Key Terms
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Chapter 12
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Copyright McGraw-Hill/Irwin 2002