Chapter 11: Aggregate Demand and Aggregate Supply

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Chapter 11 Aggregate Demand and Aggregate Supply

• Content and Visuals taken from McConnell/Brues
  Economics

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Overview

• 3 big ideas
• Aggregate Demand
• Aggregate Supply
• Equilibrium

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Aggregate Demand

• Shows the amount of REAL outputs that buyers
  desire to purchase at each possible price level
• Essentially shows how much all of us together buy
• Like micro, always represented by a downward
  sloping linebuy why?

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Explained

• In MICRO, there are 3 reasons for downward
  slopewhat are they?
• Income Effect, Substitution Effect, and Law of
  Diminishing Marginal Utility
• In MACRO the 3 reasons are different
• REAL-BALANCES EFFECT, INTEREST-RATE EFFECT,
  FOREIGN PURCHASES EFFECT

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More EXPLAINED

• Real-balances effecthigher prices mean we cannot
  buy as much so we are more likely to save
• Interest-rate Effectat a lower rate we will
  borrow more, at higher rate borrow less,
  effecting how much we can buy overall
• Foreign Purchases effectif our prices are
  higher, we are more likely to buy cheaper imports

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Aggregate Supply

• Amount of REAL domestic output that will be
  produced at each price level
• Big difference in response between LONG RUN and
  SHORT RUN
• In long run, everything can respond/change,
  including wages
• In short run, only inputs can changewages
  sticky

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Keynesian Curve

• 3 distinct parts culminating at vertical
• Input costs will most determine where curve
  is75 of costs from labor
• PRODUCTIVITY and capital deepening WILL ALSO
  AFFECT CURVE
• Govt can influence through taxes and subsidies

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Equilibrium

• HAPPY price and output
• Anything above this point will discourage
  spending (inflation) and reduce outputanything
  below will encourage spending and increase output

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Few Additions

• Deflationprices actually go down
• Disinflationstill inflation but at a lower level
• Efficiency Wageswage that produces best results
  in productivitydoesnt have to be lowest wage if
  produce more at higher pay (SHEETZ)
• Menu Costsprice of changing pricesmight
  encourage producers to change prices less
  frequently but in bigger steps (soda machines)
• Since there is a cost of printing new menus,
  changing pricing machines, etc.

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2 Types of Inflation

• Demand-Pullincrease in AD shifting the curve to
  the right raising prices
• Cost-Pushdecrease in AS shifting the curve to
  the left raising prices
• STAGFLATIONworst possible situation with
  decrease in output and increase in price (due to
  cost-push or SUPPLY SHOCKS)

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Demand pull
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Cost Push
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ALL IN ALL

• Chapter focusing on interaction of total demand
  (AD) and total supply (AS) to determine our
  HAPPY PLACE in the economy
• Only one happy place and as we see in Chapter 12
  the govt takes steps to keep us there

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Summary

• AD, AS, real GDP, equilibrium, natural rate of
  unemployment, full employment level of output
• By combining AS and AD with the full employment
  level of output we can determine where we are
  supposed to be in regards to GDPnow we just have
  to figure out how to get there