Aggregate Supply / Demand

Aggregate Demand (AD) - the same as GDP and calculated the same

is the same bc as demand increases more will be produced increasing GDP

less demand means less reason to produce

= Consumption + Gov spending + Investment spending + Net eXports (export - imports)

y-axis - price level for all

x-axis - real output

price lvl go up → real output go down

price lvl go down → real output go up

Short run - refers to fact that producers have fixed costs and variable costs that limit their ability flexibility to respond to market changes to maintain profits

Long run - period of time when al production costs can be changed

Nominal wages - amount of $ paid to employees

sticky wages - whenever the nominal wages changes but dont change for a while they aren’t sticky forever bc of the way employees would react

money illusion - when nominal wages change people will react more harshly when compared to real wage even when getting a raise that decreases their real wage

nominal price rigidity (price stickiness) - refers to prices that are fixed and not very flexible

Short-run aggregate supply (SRAS)

y axis - price lvl

x axis - real output

increasing price lvl → increases GDP

SRAS Determinants

Input Prices

  •   fall shifts right

  •   rise shifts left

Workplace Productivity

  •  more shifts right

  •  less shifts left

Gov Actions

Inflationary Expectations

  • inflation expected is increased it will shift rightward

  • inflaction expected decreases it will shift leftward

  • misperception theory - they increase prices since they think they are uniquely effected and they will make more money

Wealth effect

prices go up, buy less, become poorer

prices go down, buy more, become richer

Interest rate effect

interest rate go up → consumption go down investment spending go down

interest rate goes up, individual and business investment goes down

less borrowing = less spending

exchange rate effect

if nations currency appretiates

imports are cheaper domestically

exports are more expensive internationally

decrease Net Exp idecreases AD / GDP

nations currency depreciates

imports are expensive domestically

exports are cheaper internationsally

increase Net Exp increases AD / GDP