CHAPTER 27

Aggregate Supply and AggregateDemand

PowerPoint® Slides by Can Erbil

© 2005 Worth Publishers, all rights reserved

2

What you will learn in this chapter:

How the aggregate supply curve illustrates the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

Why the aggregate supply curve different in the short run compared to the long run

How the aggregate demand curve illustrates the relationship between the aggregate price level and the quantity of aggregate output demanded in the economy

How the AS–AD model is used to analyze economic fluctuations

How monetary policy and fiscal policy can stabilize the economy

3

The Short-Run Aggregate Supply Curve

4

Shifts of the Short-Run Aggregate Supply Curve

5

Shifts of the Short-Run Aggregate Supply CurveChanges in

Commodity prices

Nominal wages

Productivity

6

Long-Run Aggregate Supply Curve

7

Actual and Potential Output

8

Economic Growth Shifts the LRAS Curve Rightward

9

From the Short Run to the Long Run

10

The Aggregate Demand Curve

11

Why is the aggregate demand curve downward-sloping?

Wealth effect of a change in the aggregate price level

Interest rate effect of a change in aggregate the price level

12

Shifts of the Aggregate Demand CurveChanges in

Expectations

Wealth

Stock of physical capital

13

Shifts of the Aggregate Demand Curve

14

The Multiplier

The size of the multiplier, 1/1 – MPC, depends on the marginal propensity to consume, MPC: the larger the MPC, the larger the change in real GDP for any given autonomous increase in aggregate spending.

15

The Multiplier

16

The AS–AD Model

17

Shifts of the SRAS Curve

18

Shifts of Aggregate Demand: Short-Run Effects

19

Long-Run Macroeconomic Equilibrium

20

Short-Run Versus Long-Run Effects of a Negative Demand Shock

21

Short-Run Versus Long-Run Effects of a Positive Demand Shock

22

Negative Supply Shocks

23

Macroeconomic Policy

Fiscal policy affects aggregate demand directly through government purchases and indirectly through changes in taxes or government transfers that affect consumer spending. Monetary policy affects aggregate demand indirectly through changes in the interest rate that affect consumer and investment spending.

24

The End of Chapter 27

coming attraction:Chapter 28:

Income and Expenditure