1. 11 - 1
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
Aggregate Demand
and
Aggregate Supply
11C H A P T E R
2. 11 - 2
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
Defined: The amounts of real
output that buyers
collectively desire to
purchase at each possible
price level
AGGREGATE DEMAND
Aggregate Demand Curve
Down Sloping Due To:
•Real-Balances Effect
•Interest-Rate Effect
•Foreign Purchases Effect
3. 11 - 3
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
Aggregateexpenditures
(billionsofdollars)
0
0
Pricelevel
GDP1
P1
AE1 at P 1
1
1’
P2
AE2 at P 2
2
2’
AE3 at P 3
3
P3
3’
The Aggregate Demand
Can Be Constructed
DERIVATION OF THE AGGREGATE DEMAND CURVE
GDP3GDP2
GDP1GDP3GDP2
AD
4. 11 - 4
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
Pricelevel
Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND
AD1
AD2
Aggregate Demand
Can Increase
5. 11 - 5
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
Pricelevel
Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND
AD1
AD3
Aggregate Demand
Can Increase
…or Decrease
6. 11 - 6
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
DETERMINANTS OF AGGREGATE DEMAND
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
7. 11 - 7
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
DETERMINANTS OF AGGREGATE DEMAND
Government Spending
Net Export Spending
• National Income Abroad
• Exchange Rates
Changes in Aggregate Demand Shifts
and the Aggregate Expenditures Model
Illustrated…
8. 11 - 8
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
Aggregateexpenditures
(billionsofdollars)
0
0
Pricelevel
GDP2
AE2 at P 2
P1
AE1 at P 1
SHIFTS IN THE AGGREGATE EXPENDITURES
SCHEDULE & THE AGGREGATE DEMAND CURVE
GDP1
GDP2GDP1
AD1
AD2
Increase in
Aggregate
Expenditures
Increase in
Aggregate
Demand
9. 11 - 9
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
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
AGGREGATE SUPPLY
Defined: The amounts of real
output that firms will produce
at each possible price level
10. 11 - 10
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
AGGREGATE SUPPLY
Pricelevel
Real domestic output, GDP
Q
P
Horizontal
Range
Upsloping or
Intermediate
Range
Vertical
Range
11. 11 - 11
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
AGGREGATE SUPPLY
Pricelevel
Real domestic output, GDP
Q
P AS3AS1AS2
Increase In
Aggregate
Supply
Decrease In
Aggregate
Supply
Changes in Aggregate Supply
12. 11 - 12
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
DETERMINANTS OF AGGREGATE SUPPLY
Change in Input Prices
Domestic Resource
Availability
• Land
• Labor
• Capital
• Entrepreneurial Ability
Prices of Imported Goods
Market Power
13. 11 - 13
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
DETERMINANTS OF AGGREGATE SUPPLY
Change in Productivity
Productivity =
Real Output
Input
Change in Legal-Institutional
Environment
• Business Taxes and
Subsidies
• Government Regulation
14. 11 - 14
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
Q
P AS
AD
Equilibrium in the
Intermediate Range
QeQ1 Q2
EQUILIBRIUM: REAL OUTPUT
AND THE PRICE LEVEL
P1
Pe
15. 11 - 15
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
Q
P AS
AD
Equilibrium in the
Horizontal Range
QeQ1 Q2
EQUILIBRIUM: REAL OUTPUT
AND THE PRICE LEVEL
Pe
16. 11 - 16
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
Q
P AS
AD2
Increasing Demand in the Horizontal Range
Q1 Q2
CHANGES IN EQUILIBRIUM
P1
AD1
17. 11 - 17
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
Q
P AS
AD4
Increasing Demand in the Intermediate Range
Q3 Q4
CHANGES IN EQUILIBRIUM
P3
AD3
P4
18. 11 - 18
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
Q
P AS
AD6
Increasing Demand in the Vertical Range
Qc
CHANGES IN EQUILIBRIUM
P5
AD5
P6
19. 11 - 19
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
AS
AD2
Inflation and the Multiplier
GDP1 GDP2
MULTIPLIER WITH
PRICE-LEVEL CHANGES
P1
AD1
AD3
GDP3
P2
Full Multiplier
Effect Reduced
Multiplier
Effect Due
to Inflation
20. 11 - 20
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
Decreasing Demand That Causes A Recession
DECREASES IN AD AND RECESSION
•Wage Contracts
•Morale, Effort, and
Productivity
•Efficiency Wages
•Minimum Wage
•Menu Costs
•Fear of Price Wars
Recession and Cyclical Unemployment
21. 11 - 21
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
AS
AD1
Decreasing Demand That Causes A Recession
Q2 Q1
DECREASES IN AD AND RECESSION
P1
AD2
22. 11 - 22
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
AS1
AD
Decreasing Supply That Causes A Recession
Q2 Q1
DECREASES IN AD AND RECESSION
P1
P2
AS2
23. 11 - 23
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
AS2
Increasing Supply: Full-Employment and
Price-Level Stability
Q2 Q3
INCREASES IN AS AND INFLATION
P1
P3
AS1
AD1
AD2
P2
Q1
24. 11 - 24
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
PriceLevel
Real Domestic Output, GDP
AS2
Increasing Supply: Full-Employment and
Price-Level Stability
Q2 Q3
INCREASES IN AS AND INFLATION
P1
P3
AS1
AD1
AD2
P2
Q1
Chapter
Conclusions
25. ENDBACK
aggregate demand-
aggregate supply (AD-
AS) model
aggregate demand
real-balances effect
interest-rate effect
foreign purchases effect
determinants of aggregate
demand
aggregate supply
horizontal range (of AS
curve)
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
Copyright McGraw-Hill/Irwin, 2002
26. 11 - 26
Copyright McGraw-Hill/Irwin 2002
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
Previous
Slide
Next
Slide
End
Show
Coming
next... FISCAL
POLICY
Chapter
12