Ch09-- Macroeconomic Equilibrium: AD and AS

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Macroeconomic Equilibrium:

Aggregate Demand and Supply



Economics, Sixth Edition

Boyes/Melvin




Chapter 9

2


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Why the Aggregate Demand Curve
Slopes Downward (1)


Aggregate demand (AD)

is the economy
-
wide
demand for goods and services.


Like the market demand curve, the aggregate
demand curve
slopes downward
, but for different
reasons.


The reasons for its downward slope are
price
-
level
effects
:


Wealth Effect (Real Wealth/Real Balances)


Interest Rate Effect


International Trade Effect (Substitution)

3


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Why the Aggregate Demand Curve
Slopes Downward (2)

4


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The Interest Rate Effect

5


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Why the Aggregate Demand Curve
Slopes Downward (4)

6


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The
Aggregate
Demand
Curve

Note that
changes in prices
result in changes
in the
quantity
demand
.

7


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Factors that Affect AD


Consumption


Income


Wealth


Expectations


Demographics


Taxes


Investment


Interest Rates


Technology


Cost of Capital Goods


Capacity Utilization

AD = C + I + G + NX


Government Spending


Net Exports


Domestic & Foreign
Income


Domestic & Foreign Prices


Exchange Rates


Government Policy

8


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Non
-
price Determinants: Changes in
Aggregate Demand (1)

9


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Nonprice Determinants: Changes in
Aggregate Demand (2)

10


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Non
-
price Determinants: Changes in
Aggregate Demand (3)

11


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Shifting the
Aggregate
Demand Curve

12


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Effects of a
Change in
Aggregate
Demand

Demand
-
pull
inflation
: rapid
increases in AD
outpace the
growth of AS,
causing price level
increases
(inflation).

13


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Short
-
run Aggregate Supply


Aggregate Supply (AS) is the total of all
the firm (market) supply curves.


It shows the quantity of real GDP
produced at different price levels.


Short
-
run AS

slopes upward

because an
increase in the price level (while
production costs and capital are held
constant on the short
-
run), means higher
profit margins

firms will want to produce
more.

14


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Aggregate
Supply

15


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Shape of Short
-
run AS (SRAS)


In the short
-
run, the capital stock
(the number of factories and
machines, etc.) are held constant.


Increasing the number of workers
increases output, but at a
diminishing rate.


Diminishing returns manifest as an
ever
-
steeper SRAS curve.

16


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The Shape of
the Short
-
Run
Aggregate
Supply Curve

17


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The Shape of Long
-
run AS (LRAS)


Resource costs are NOT fixed.


As prices rises, workers will want higher
wages and will eventually get them.


The amount of capital is not fixed

firms
can build new plants and buy new
equipment over the long
-
run.


In the long
-
run, AS is set by the
production possibilities curve

the
capacity of the economy, and is not
affected by prices, hence is vertical.

18


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The Shape of the
Long
-
Run
Aggregate
Supply Curve

19


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Determinants of Aggregate Supply (1)

20


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Determinants of Aggregate Supply (2)

21


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Determinants of Aggregate Supply (3)

22


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Shifting the
Long
-
Run
Aggregate
Supply Curve

Growth occurs as the
labor force and the
capital stock grow, as
technological
innovation improves
production efficiency.

23


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Changes in
Aggregate
Supply

24


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Effects of a
Change in
Aggregate
Supply

Cost
-
push
inflation
: cost
increases push
AS to the left
(relative to AD),
causing price
level increases
(inflation).

25


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Aggregate
Demand and
Aggregate
Supply
Equilibrium

26


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Aggregate
Demand and
Supply
Equilibrium

27


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Economic Insight:
OPEC and
Aggregate Supply

28


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rights reserved.

29


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rights reserved.

30


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rights reserved.