Macro Chapter 9. Aggregate Demand and Supply

Aggregate

A summing up of various economic parts

Aggregate Demand (AD)

The total quantity of goods and services
demanded at different price levels

Real Balances Effect

High price levels reduce the purchasing power of money, reducing spending. Lower price levels increase purchasing power, increasing spending

Interest Rate Effect

High price levels increase the demand for money, which raises interest rates and reduces total spending. Lower price levels reduce the demand for money, which lowers interest rates and increases spending

Foreign Purchases Effect

An inverse relationship between domestic price levels and net exports. When domestic prices are high, imports go up

Determinants of AD

Factors that influence the level of C, Ig, G, Xn These include: Consumer wealth, taxes, real interest rates, technology

Aggregate Supply (AS)

The total quantity of goods and services supplied by firms at different price levels. The shape of the aggregate supply curve depends on the time period: Immediate, Short or Long Run

AS Immediate Period

A short time period. All input and output prices are fixed. The Immediate Supply curve is horizontal

AS Short Run

In the short run output prices are flexible, some input prices are fixed, some are flexible. Firms will supply more at higher prices resulting in an upwardly sloping short run supply curve

AS Long Run

All input and output prices are flexible. In the long run the economy produces the full employment level of GDP resulting in a vertical long run supply curve at the full employment GDP level

Determinants of AS

Factors that influence the amount supplied at each price level. These include: domestic and foreign input prices, productivity changes from new technology, taxes, regulation

Productivity

Productivity =
(Total output)/(Total inputs)

Legal/Institutional Environment

Changes in taxes, subsidies and regulations
influence the aggregate supply

AD,AS and Equilibrium

The intersection of AD & AS results in
an equilibrium price level and output

Equilibrium Price Level

The price level where aggregate demand equals aggregate supply

Equilibrium Real Output

The level of output where aggregate demand and aggregate supply are equal