11 - 1

Copyright McGraw-Hill/Irwin, 2005

Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
Aggregate Demand
and
Aggregate Supply
11
C H A P T E R
Click To Go
To Appendix
11 - 2
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
Defined:
Amounts of Real Output
Buyers Collectively Desire
At Each Possible Price Level
AGGREGATE DEMAND
Aggregate Demand Curve
Down Sloping Due To:
Real-Balances Effect
Interest-Rate Effect
Foreign Purchases Effect
Graphically
11 - 3
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
AGGREGATE DEMAND CURVE
P
r
i
c
e

l
e
v
e
l

Real domestic output, GDP
AD

11 - 4
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
P
r
i
c
e

l
e
v
e
l

Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND
AD
1
AD
2
Aggregate Demand
Can Increase
11 - 5
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
P
r
i
c
e

l
e
v
e
l

Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND
AD
1
AD
3
or Decrease
Aggregate Demand
Can Increase
11 - 6
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
DETERMINANTS OF AGGREGATE DEMAND
Change in Consumer Spending
Consumer Wealth
Consumer Expectations
Household Indebtedness
Taxes
Change in Investment Spending
Real Interest Rates
Expected Returns
Expected Future Business
Conditions
Technology
Degree of Excess Capacity
Business Taxes
11 - 7
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
DETERMINANTS OF AGGREGATE DEMAND
Government Spending
Net Export Spending
National Income Abroad
Exchange Rates
11 - 8
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
AGGREGATE SUPPLY
Defined:
Levels of Real Domestic
Output
At Each Possible Price
Level
Long-run Supply Curve
Wages and Resource
Prices Match Price Level
Short-run Supply Curve
Wages and Resource
Prices Do Not Match
Price Level
11 - 9
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
AGGREGATE SUPPLY
P
r
i
c
e

l
e
v
e
l

Real domestic output, GDP
Q
P
Long Run
AS
LR
Long-run
Aggregate
Supply
Q
f
Full-Employment
11 - 10
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
AGGREGATE SUPPLY
P
r
i
c
e

l
e
v
e
l

Real domestic output, GDP
Q
P
Short Run
AS

Aggregate
Supply
Short-run
Q
f
Full-
Employment
11 - 11
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
AGGREGATE SUPPLY
P
r
i
c
e

l
e
v
e
l

Real domestic output, GDP
Q
P
AS
3
AS
1
AS
2
Increase In
Aggregate
Supply
Decrease In
Aggregate
Supply
Changes in Aggregate Supply
11 - 12
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
DETERMINANTS OF AGGREGATE SUPPLY
Input Prices
Domestic Resource Prices
Labor
Land
Capital
Prices of Imported Goods
Market Power
11 - 13
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
DETERMINANTS OF AGGREGATE SUPPLY
Productivity
Productivity
=
Total Output
Total Inputs
Legal-Institutional
Environment
Business Taxes and
Subsidies
Government Regulation
11 - 14
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
P
r
i
c
e

L
e
v
e
l

Real Domestic Output, GDP
Q
P
AS
AD
EQUILIBRIUM AND CHANGES
IN EQUILIBRIUM
92

100

a b
Equilibrium
Real Output
11 - 15
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
P
r
i
c
e

L
e
v
e
l

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
11 - 16
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
P
r
i
c
e

L
e
v
e
l

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
11 - 17
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
Wage Contracts
Morale, Effort, and
Productivity
Efficiency Wages
Minimum Wage
Menu Costs
Fear of Price Wars
DECREASES IN AD: RECESSION
& CYCLICAL UNEMPLOYMENT
11 - 18
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
P
r
i
c
e

L
e
v
e
l

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
11 - 19
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
P
r
i
c
e

L
e
v
e
l

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
END BACK
aggregate demand-
aggregate supply (AD-
AS) model
aggregate demand
real-balances effect
interest-rate effect
foreign purchases effect
determinants of aggregate
demand
aggregate supply
long-run aggregate supply
curve
short-run aggregate supply
curve
determinants of aggregate
supply
productivity
equilibrium price level
equilibrium real output
efficiency wages
menu costs
Copyright McGraw-Hill/Irwin, 2005
11 - 21
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
RELATIONSHIP OF THE AGGREGATE
DEMAND CURVE TO THE AGGREGATE
EXPENDITURES MODEL
Derivation of the
Aggregate Demand Curve
from the
Aggregate Expenditures Model
Illustrated
CHAPTER 11 - Appendix
11 - 22
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
A
g
g
r
e
g
a
t
e

e
x
p
e
n
d
i
t
u
r
e
s

(
b
i
l
l
i
o
n
s

o
f

d
o
l
l
a
r
s
)

0
0
P
r
i
c
e

l
e
v
e
l

Q
1
P
1
AE
1
at P
1
1
1
P
2
AE
2
at P
2
2
2
AE
3
at P
3
3
P
3
3
The Aggregate Demand
Can Be Constructed
DERIVATION OF THE AGGREGATE DEMAND CURVE
Q
3
Q
2
Q
1
Q
3
Q
2
AD
Click To Return
To Presentation
Real Domestic Output
11 - 23
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
A
g
g
r
e
g
a
t
e

e
x
p
e
n
d
i
t
u
r
e
s

(
b
i
l
l
i
o
n
s

o
f

d
o
l
l
a
r
s
)

0
0
P
r
i
c
e

l
e
v
e
l

Q
2
AE
2
at P
1
P
1
AE
1
at P
1
SHIFTS IN THE AGGREGATE EXPENDITURES
SCHEDULE & THE AGGREGATE DEMAND CURVE
Q
1
Q
2
Q
1
AD
1
AD
2
Increase in
Aggregate
Expenditures
Increase in
Aggregate
Demand
Click To Return
To Presentation
Real Domestic Output
11 - 24
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
A
g
g
r
e
g
a
t
e

e
x
p
e
n
d
i
t
u
r
e
s

(
b
i
l
l
i
o
n
s

o
f

d
o
l
l
a
r
s
)

0
0
P
r
i
c
e

l
e
v
e
l

Q
2
AE
2
at P
1
P
1
AE
1
at P
1
SHIFTS IN THE AGGREGATE EXPENDITURES
SCHEDULE & THE AGGREGATE DEMAND CURVE
Q
1
Q
2
Q
1
AD
1
AD
2
Increase in
Aggregate
Expenditures
Increase in
Aggregate
Demand
Click To Return
To Presentation
Real Domestic Output
11 - 25
Copyright McGraw-Hill/Irwin, 2005
Aggregate Demand
Changes in AD
Determinants of AD
Aggregate Supply
Determinants of AS
Equilibrium &
Changes in
Equilibrium
Appendix
Key Terms
Previous
Slide
Next
Slide
End
Show
FI SCAL
POLI CY