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24.1 Aggregate Demand Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve. 24.2 Aggregate Supply Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve. 24.3 (^) Macroeconomic Equilibrium in the Long Run and the Short Run Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium. 24.4 A Dynamic Aggregate Demand and Aggregate Supply Model Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions. Appendix: Macroeconomic Schools of Thought Understand macroeconomic schools of thought.
CHAPTER
Chapter Outline and Learning Objectives
Aggregate Demand
and Aggregate
Supply Analysis
Aggregate Demand Aggregate demand and aggregate supply model A model that explains short-run fluctuations in real GDP and the price level.
FIGURE 24-
Aggregate Demand and
Aggregate Supply
Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve. In the short run, real GDP and the price level are determined by the intersection of the aggregate demand curve and the short-run aggregate supply curve. In the figure, real GDP is measured on the horizontal axis, and the price level is measured on the vertical axis by the GDP deflator. In this example, the equilibrium real GDP is $14.0 trillion, and the equilibrium price level is 100.
Aggregate Demand GDP has four components: consumption ( C ), investment ( I ), government purchases ( G ), and net exports ( NX ). If we let Y stand for GDP, we can write the following: Y = C + I + G + NX Why Is the Aggregate Demand Curve Downward Sloping? The Wealth Effect: How a Change in the Price Level Affects Consumption The impact of the price level on consumption is called the wealth effect. Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Aggregate Demand The impact of the price level on investment is known as the interest-rate effect. Why Is the Aggregate Demand Curve Downward Sloping? The International-Trade Effect: How a Change in the Price Level Affects Net Exports The impact of the price level on net exports is known as the international-trade effect. The Interest-Rate Effect: How a Change in the Price Level Affects Investment Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Aggregate Demand
- Changes in government policies
- Changes in the expectations of households and firms
- Changes in foreign variables The Variables That Shift the Aggregate Demand Curve Don’t Let This Happen to YOU!
Understand Why the Aggregate Demand Curve Is Downward Sloping
The variables that cause the aggregate demand curve to shift fall into three categories:
YOUR TURN: Test your understanding by doing related problem 1.5 at the end
of this chapter. Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Aggregate Demand Monetary policy The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives. The Variables That Shift the Aggregate Demand Curve Changes in Government Policies Fiscal policy Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Solved Problem 24- Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve
YOUR TURN: For more practice, do related problem 1.6 at the end of this chapter.
Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Aggregate Demand The Variables That Shift the Aggregate Demand Curve
Table 24-
Variables That Shift the Aggregate Demand Curve
Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Aggregate Demand The Variables That Shift the Aggregate Demand Curve
Table 24-
Variables That Shift the Aggregate Demand Curve
(continued)
Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Aggregate Demand The Variables That Shift the Aggregate Demand Curve
Table 24-
Variables That Shift the Aggregate Demand Curve
(continued)
Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve.
Aggregate Supply The Long-Run Aggregate Supply Curve
FIGURE 24-
The Long-Run Aggregate
Supply Curve
Changes in the price level do not affect the level of aggregate supply in the long run. Therefore, the long-run aggregate supply curve, labeled LRAS , is a vertical line at the potential level of real GDP. For instance, the price level was 109 in 2009, and potential real GDP was $13.9 trillion. If the price level had been 119, or if it had been 99, long-run aggregate supply would still have been a constant $13.9 trillion. Each year, the long-run aggregate supply curve shifts to the right, as the number of workers in the economy increases, more machinery and equipment are accumulated, and technological change occurs. Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve.
Aggregate Supply
- Contracts make some wages and prices “sticky.”
- Firms are often slow to adjust wages.
- Menu costs make some prices sticky. The Short-Run Aggregate Supply Curve The three most common explanations as to why a short- run aggregate supply curve slopes upward include: Menu costs The costs to firms of changing prices. Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve.
Aggregate Supply Variables That Shift the Short-Run Aggregate Supply Curve Expected Changes in the Future Price Level
FIGURE 24-
How Expectations of the
Future Price Level Affect
the Short-Run Aggregate
Supply
The SRAS c urve shifts to reflect worker and firm expectations of future prices.
- If workers and firms expect that the price level will rise by 3 percent, from 100 to 103, they will adjust their wages and prices by that amount.
- Holding constant all other variables that affect aggregate supply, the short-run aggregate supply curve will shift to the left. If workers and firms expect that the price level will be lower in the future, the short-run aggregate supply curve will shift to the right. Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve.
Aggregate Supply Variables That Shift the Short-Run Aggregate Supply Curve Adjustments of Workers and Firms to Errors in Past Expectations about the Price Level Unexpected Changes in the Price of an Important Natural Resource Supply shock An unexpected event that causes the short-run aggregate supply curve to shift. Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve.
