aggregate demand and aggregate supply

aggregate demand (AD)

the total quantity of total (aggregate) output, or real GDP, that all buyers in an economy want to buy at different possible price levels, ceteris paribus

aggregate demand curve

shows the relationship between the aggregate output buyer want to buy, or real GDP demanded, and the economy's price level, ceteris paribus

What does aggregate demand consist of?

the demand of customers; the demand of businesses; the demand of government; net exports

Determinants of aggregate demand (definition)

they are changes in one of the four components of AD, and any change causes shifts of AD curve

determinants of aggregate demand (list them)

changes in consumer spending; changes in investment spending; changes in government spending; changes in net imports spending

list all causes of changes in consumer spending

1. consumer confidence

2. changes in interest rates

3. changes in wealth

4. changes in income taxes

5. expectations of future prices

6. changes in level of household indebtedness

list all causes of changes in investment spending

1. changes in interest rates

2. changes in business confidence

3. improvements in technology

4. changes in business taxes

5. legal/institutional changes

6. changes in the level of corporate indebtedness

list all causes of changes in government spending

1. changes in government priorities

2. changes in government spending in efforts to influence AD

list all causes of changes in net imports spending

1. changes in national income abroad

2. changes in exchange rates

3. changes in trade policies

short run in macroeconomics

a period of time when resource prices and wages are roughly constant or inflexible despite changes in the price level

aggregate supply

the quantity of goods and services produced within an economy (real GDP) over a particular period of time at different possible price levels

SRAS curve

short-run aggregate supply curve - shows the relationship between the price level and the quantity of real output (real GDP) produced within an economy when resource prices do not change

factors that cause shifts in SRAS curve

1. changes in wages

2. changes in non-labor resource prices

3. changes in indirect taxes

4. changes in subsidies offered to businesses

5. supply shocks

Why is LRAS curve vertical

the LRAS curve is vertical, because in the long-run the resource prices and wages are now changing to match changes in output, so firms’ costs of production remain constant as price level change - therefore as price level increases or decreases the profit remains the same

deflationary gap

situation when real GDP is lower than the potential GDP due to too low AD. The unemployment is greater than the natural rate of unemployment

Inflationary gap

Real GDP is higher than the potential GDP, due to too high AD. Unemployment rate is lower than the natural rate of unemployment, because all resources are employed

Factors that cause LRAS to shift

1. Increases in quantities of the factors of production

2. Improvements in the quality of factors of production

3. Improvements in technology

4. Increases in efficiency

5. Institutional changes

6. Reductions in the natural rate of unemployment

Contrast the Keynesian and new classical/monetarist model

1. In the Keynesian model economy can remain stuck in the deflationary gap whereas in the classical/new monetarist model the economy has a tendency to return to the full employment equilibrium without a government intervention

2. In the Keynesian model there is a period where AD can increase without any change in price level whereas in monetarist/new classical model any change in AD results in changes in price level