9. 3 Reasons For Downward Sloping AD Curve Real Money-balances E ffect – economy’s monetary wealth. If we buy a fixed bundle of goods & services (food/clothing/shelter), at lower prices, it now takes less money. Our accumulated savings balances [401k, CDs, bonds] will purchase more. AD Interest Rate Effect – lower interest rates increase investment and consumption. Foreign Purchase Effect – with lower U.S. prices, both Americans and foreigners buy more American goods. Market Basket PL 1 PL 2
10. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Horizontal Range Upsloping or Intermediate Range Vertical Range
11. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P AS 3 AS 1 AS 2 Increase In Aggregate Supply Decrease In Aggregate Supply Changes in Aggregate Supply
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14. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Long Run AS LR Long-run Aggregate Supply Q f Full-Employment
15. AGGREGATE SUPPLY Price level Real domestic output, GDP Q P Short Run AS Aggregate Supply Short-run Q f Full- Employment
16. Price Level Real Domestic Output, GDP Q P AS AD 510 502 514 EQUILIBRIUM AND CHANGES IN EQUILIBRIUM 92 100 a b Equilibrium Real Output
17. Price Level Real Domestic Output, GDP Q P AS AD 1 INCREASES IN AD: DEMAND-PULL INFLATION P 2 P 1 AD 2 Q f Q 1 Q 2
18. Price Level Real Domestic Output, GDP Q P AS AD 1 DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT P 1 AD 2 Q f Q 1 a c b
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20. Price Level Real Domestic Output, GDP Q P AS 1 AD 1 DECREASES IN AS: COST-PUSH INFLATION P 2 Q f Q 1 a b AS 2 P 1
21. Price Level Real Domestic Output, GDP Q P AS 1 AD 1 INCREASES IN AS: FULL EMPLOYMENT P 1 Q 2 Q 1 a b AS 2 P 2 … With Price-Level Stability AD 2 P 3 Q 3 Any Questions?
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