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GROUP MEMBERS
 MUHAMMAD SHAHROZE ILYAS
 MUBEEN ABDUL SHAKOOR
 ADEEL ASIF
 MUHAMMAD FAHAD KHAN
AGGREGATE-DEMAND
 In economics aggregate demand is
the total demand for final goods
and services in the economy at a
give...
Aggregate Demand
 The sum of all expenditure in the economy over a
period of time
 Macro concept – WHOLE economy
 Formu...
Aggregate Demand –Key
Variables
 Consumption Expenditure
 Investment Expenditure
 Government Expenditure
 Import Spend...
Consumption Expenditure
 Exogenous factors affecting consumption:
◦ Tax rates
◦ Incomes – short term and expected income ...
Investment Expenditure
 Spending on:
◦ Machinery
◦ Equipment
◦ Buildings
◦ Infrastructure
 Influenced by:
◦ Expected rat...
Government Spending
 Defence
 Health
 Social Welfare
 Education
 Foreign Aid
 Regions
 Industry
 Law and Order
Import Spending (negative)
 Goods and services bought from
abroad – represents an outflow of
funds from the country (redu...
Export Earnings (Positive)
 Goods and services sold abroad –
represents a flow of funds into the
country (raises AD)
Aggregate Demand Curve
 The aggregate
demand (AD)
curve is a curve
that shows the
negative
relationship
between aggregate...
Deriving the Aggregate Demand
Curve
 To derive the aggregate demand
curve, we examine what happens to
aggregate output (i...
Deriving the Aggregate Demand
Curve
 The AD curve is
not a market
demand curve, and
it is not the sum of
all market deman...
Aggregate Demand Curve
 Aggregate demand falls when the price
level increases because the higher price level
causes the d...
Reasons why AD is downward
sloping
 The consumption link: The
decrease in consumption brought
about by an increase in the...
Shifts in AD
 Changes in
Governmental
Policies
 Changes in Monetary
Policy
 Changes in
Expectations of
Households and
F...
Factors that Effect Aggregate
Demand
 1. Income
 2. Wealth
 3. Population
 4. Interest rates
 5. Credit availability
...
AGGREGATE
SUPPLY
AGGREGATE
SUPPLY
Aggregate supply is the total
supply of goods and services
in an economy.
AGGREGATE SUPPLY
CURVE
Curve shows relation between
aggregate quantity of output supplied by
all the firms in an economy ...
AGGREGATE SUPPLY IN
THE SHORT RUN
In the short run, the
aggregate supply curve
(the price/output
response curve) has a
po...
AGGREGATE SUPPLY IN THE
SHORT RUN
Macroeconomists focus on whether or
not the economy as a whole is operating
at full cap...
AGGREGATE SUPPLY IN THE
SHORT RUN
At low levels of
aggregate output the
curve is fairly flat.
As economy
approaches capa...
The Response of Input Prices to
Changes in the Overall Price
Level
There must be a lag between
changes in input prices an...
WHY IS THE SHORT RUN
CURVE UPWARD SLOPING?
Short-run aggregate supply curve slopes
upward because:
 Contracts make some w...
Shifts of the Short-Run
Aggregate Supply Curve
A decrease in aggregate
supply
An increase in aggregate
supply
Bad weather, natural
disasters, destruction
from wars
Good weather
Public policy
waste and inefficiency
over-regulation
Pu...
The Equilibrium Price Level
AD represents money
and goods market in
equilibrium.
AS represents
price/output decisions of...
The Long-Run
Aggregate Supply Curve
Costs lag behind
price-level changes in
the short run, resulting
in an upward-sloping...
The Long-Run
Aggregate Supply Curve
Output can be
pushed above
potential GDP by
higher aggregate
demand. The
aggregate pr...
The Long-Run
Aggregate Supply Curve
When output is
pushed above
potential, there is
upward pressure on
costs, and this ca...
The Long-Run
Aggregate Supply Curve
Y0 represents
the level of
output that can
be sustained in
the long run
without
infla...
THANK YOU
Aggregate Demand and Aggregate Supply and Curves
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Aggregate Demand and Aggregate Supply and Curves

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Aggregate Demand and Aggregate Supply and Curves

  1. 1. GROUP MEMBERS  MUHAMMAD SHAHROZE ILYAS  MUBEEN ABDUL SHAKOOR  ADEEL ASIF  MUHAMMAD FAHAD KHAN
  2. 2. AGGREGATE-DEMAND  In economics aggregate demand is the total demand for final goods and services in the economy at a given time and price level.  Aggregate demand is the gross domestic product of a country when inventory levels are static
  3. 3. Aggregate Demand  The sum of all expenditure in the economy over a period of time  Macro concept – WHOLE economy  Formula: AD = C+I+G+(X-M) ◦ C= Consumption Spending ◦ I = Investment Spending ◦ G = Government Spending ◦ (X-M) = difference between spending on imports and receipts from exports (Balance of Payments)
  4. 4. Aggregate Demand –Key Variables  Consumption Expenditure  Investment Expenditure  Government Expenditure  Import Spending  Export Earning
  5. 5. Consumption Expenditure  Exogenous factors affecting consumption: ◦ Tax rates ◦ Incomes – short term and expected income over lifetime ◦ Wage increases ◦ Credit ◦ Interest rates ◦ Wealth  Property  Shares  Savings  Bonds
  6. 6. Investment Expenditure  Spending on: ◦ Machinery ◦ Equipment ◦ Buildings ◦ Infrastructure  Influenced by: ◦ Expected rates of return ◦ Interest rates ◦ Expectations of future sales ◦ Expectations of future inflation rates
  7. 7. Government Spending  Defence  Health  Social Welfare  Education  Foreign Aid  Regions  Industry  Law and Order
  8. 8. Import Spending (negative)  Goods and services bought from abroad – represents an outflow of funds from the country (reduces AD)
  9. 9. Export Earnings (Positive)  Goods and services sold abroad – represents a flow of funds into the country (raises AD)
  10. 10. Aggregate Demand Curve  The aggregate demand (AD) curve is a curve that shows the negative relationship between aggregate output (income) and the price level
  11. 11. Deriving the Aggregate Demand Curve  To derive the aggregate demand curve, we examine what happens to aggregate output (income) (Y) when the price level (P) changes, assuming no changes in government spending (G), net taxes (T), or the monetary policy variable (Ms).
  12. 12. Deriving the Aggregate Demand Curve  The AD curve is not a market demand curve, and it is not the sum of all market demand curves in the economy. It is a more complex concept.
  13. 13. Aggregate Demand Curve  Aggregate demand falls when the price level increases because the higher price level causes the demand for money to rise, which causes the interest rate to rise.  It is the higher interest rate that causes aggregate output to fall.  At all points along the AD curve, both the goods market and the money market are in equilibrium.
  14. 14. Reasons why AD is downward sloping  The consumption link: The decrease in consumption brought about by an increase in the interest rate contributes to the overall decrease in output.  The real wealth effect, or real balance, effect: When the price level rises, there is a decrease in consumption brought about by a change in real wealth.
  15. 15. Shifts in AD  Changes in Governmental Policies  Changes in Monetary Policy  Changes in Expectations of Households and Firms
  16. 16. Factors that Effect Aggregate Demand  1. Income  2. Wealth  3. Population  4. Interest rates  5. Credit availability  6. Government demand  7. Taxation  8. Foreign demand  9. Investment  10. Expectations (a) Inflationary (b) Income (c) Wealth (d) Interest rate (+) (+) (+) (–) (+) (+) (–) (+) (+) (+) (+) (+) (+)
  17. 17. AGGREGATE SUPPLY
  18. 18. AGGREGATE SUPPLY Aggregate supply is the total supply of goods and services in an economy.
  19. 19. AGGREGATE SUPPLY CURVE Curve shows relation between aggregate quantity of output supplied by all the firms in an economy and overall price level. It is not a market supply curve ,and it is not simple sum of all individual supply curves. Rather than an aggregate supply curve, what does exist is a “price/output response” curve
  20. 20. AGGREGATE SUPPLY IN THE SHORT RUN In the short run, the aggregate supply curve (the price/output response curve) has a positive slope
  21. 21. AGGREGATE SUPPLY IN THE SHORT RUN Macroeconomists focus on whether or not the economy as a whole is operating at full capacity. As the economy approaches maximum capacity, firms respond to further increases in demand only by raising prices.
  22. 22. AGGREGATE SUPPLY IN THE SHORT RUN At low levels of aggregate output the curve is fairly flat. As economy approaches capacity, the curve becomes nearly vertical. At capacity, the curve is vertical.
  23. 23. The Response of Input Prices to Changes in the Overall Price Level There must be a lag between changes in input prices and changes in output prices, otherwise the aggregate supply (price/output response) curve would be vertical. Wage rates may increase at exactly the same rate as the overall price level if the price-level increase is fully anticipated. Most input prices, however, tend to lag increases in output prices.
  24. 24. WHY IS THE SHORT RUN CURVE UPWARD SLOPING? Short-run aggregate supply curve slopes upward because:  Contracts make some wages and prices “sticky.”  Firms are often slow to adjust wages.  Menu costs make some prices sticky
  25. 25. Shifts of the Short-Run Aggregate Supply Curve A decrease in aggregate supply An increase in aggregate supply
  26. 26. Bad weather, natural disasters, destruction from wars Good weather Public policy waste and inefficiency over-regulation Public policy supply-side policies tax cuts deregulation Stagnation capital deterioration Economic growth more capital more labor technological change Higher costs higher input prices higher wage rates Lower costs lower input prices lower wage rates Shifts to the Left Decreases in Aggregate Supply Shifts to the Right Increases in Aggregate Supply Factors That Shift the Aggregate Supply Curve Shifts of the Short-Run Aggregate Supply Curve
  27. 27. The Equilibrium Price Level AD represents money and goods market in equilibrium. AS represents price/output decisions of all firms in ecomony. P0 and Y0 correspond to equilibrium in the goods market and the money market and a set of price/output decisions on the part of all the firms in the economy.
  28. 28. The Long-Run Aggregate Supply Curve Costs lag behind price-level changes in the short run, resulting in an upward-sloping AS curve.  Costs and the price level move in tandem in the long run, and the AS curve is vertical.
  29. 29. The Long-Run Aggregate Supply Curve Output can be pushed above potential GDP by higher aggregate demand. The aggregate price level also rises.
  30. 30. The Long-Run Aggregate Supply Curve When output is pushed above potential, there is upward pressure on costs, and this causes the short-run AS curve to the left. Costs ultimately increase by the same percentage as the price level, and the quantity supplied ends up back at Y0.
  31. 31. The Long-Run Aggregate Supply Curve Y0 represents the level of output that can be sustained in the long run without inflation. It is also called potential output or potential GDP.
  32. 32. THANK YOU

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