Slide 10-1

Spending and Total Expenditures

Aggregate Demand

– The total of all planned expenditures in the economy

Aggregate Supply

– The total of all planned production in the economy

Slide 10-2

Spending and Total Expenditures

Questions

– What determines the total amount that individuals, governments, firms, and foreigners want to spend?

– What determines the equilibrium price level?

Slide 10-3

The Aggregate Demand Curve

Aggregate Demand Curve

– A curve showing planned purchase rates for all goods and services in the economy at various price levels, all other things held constant

Aggregate demand = C + I + G + X

Slide 10-4

The Aggregate Demand Curve

Real GDP per Year($ trillions)

Pric

e Le

vel

8 90

120

AD

100

140

6 7 11 1210

A

As the price levelrises, real GDPdemand declines

Slide 10-5

The Aggregate Demand Curve

Real GDP per Year($ trillions)

Pric

e Le

vel

8 90

120

AD

A100

140

6 7 11 1210

B

Slide 10-6

The Aggregate Demand Curve

Real GDP per Year($ trillions)

Pric

e Le

vel

8 90

120

AD

A100

140

6 7 11 1210

B

C

Figure 10-4

Slide 10-7

The Aggregate Demand Curve

What happens when the price level rises?

– The Real-Balance Effect (wealth effect)

– The Interest Rate Effect

– The Open Economy Effect

Slide 10-8

The Aggregate Demand Curve

The Real-Balance Effect

– The change in the real value of money balances when the price level changes

Slide 10-9

The Aggregate Demand Curve

The Interest Rate Effect

– Higher price levels indirectly increase the interest rate.

Slide 10-10

The Aggregate Demand Curve

The Open Economy Effect

– Higher price levels result in foreigners’ desiring to buy fewer American-made goods while Americans desire more foreign-made goods (i.e., net exports fall).

Slide 10-11

Aggregate Demand versus Demand for a Single Good

When the aggregate demand curve is derived, we are looking at the entire circular flow of income and product.

When a demand curve is derived, we are looking at a single product in one market only.

Slide 10-12

Shifts in the Aggregate Demand Curve

Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right.

Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.

Slide 10-13

Shifts in the Aggregate Demand Curve

Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right.

Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.

Slide 10-14

Factors Increasing Aggregate Demand

A drop in the foreign exchange value of the dollar

Increased security about jobs and future income

Improvements in economic conditions in other countries

A reduction in real interest rates (nominal interest rates corrected for inflation) not due to price level changes

Tax decreases

An increase in the amount of money in circulation

Slide 10-15

Shifts in the Aggregate Demand Curve

Real GDP per Year($ trillions)

GD

P D

efla

tor

3 40

120

1 2 6 75

90

AD

Slide 10-16

Shifts in the Aggregate Demand Curve

Real GDP per Year($ trillions)

GD

P D

efla

tor

3 40

120

1 2 6 75

90

AD

Slide 10-17

Shifts in the Aggregate Demand Curve

Real GDP per Year($ trillions)

GD

P D

efla

tor

3 40

120

1 2 6 75

90

AD1AD

Increase in aggregate demand

Slide 10-18

Factors Decreasing Aggregate Demand

A rise in the foreign exchange value of the dollar

Decreased security about jobs and future income

Declines in economic conditions in other countries

A rise in real interest rates (nominal interest rates corrected for inflation) not due to price level changes

Tax increases

A decrease in the amount of money in circulation

Slide 10-19

Shifts in the Aggregate Demand Curve

Real GDP per Year($ trillions)

GD

P D

efla

tor

3 40

120

1 2 6 75

90

AD

Slide 10-20

Shifts in the Aggregate Demand Curve

Real GDP per Year($ trillions)

GD

P D

efla

tor

3 40

120

1 2 6 75

90

AD

Slide 10-21

Shifts in the Aggregate Demand Curve

Real GDP per Year($ trillions)

GD

P D

efla

tor

3 40

120

1 2 6 75

90

AD

Decrease in aggregate demand

AD1

Slide 10-22

The Aggregate Supply Curve

The Long-Run Aggregate Supply Curve

– Real output at full employment

– A vertical line representing real output based on full information and after full adjustment has occurred

Slide 10-23

Long-Run Equilibrium and the Price Level

Figure 10-5

Slide 10-24

Long-Run Equilibrium and the Price Level

Long-run equilibrium occurs at the intersection of the LRAS curve and the AD curve

– Equilibrium price level is determined

– Planned real expenditures for the economy are equal to total planned production along the economy’s trends growth path

Slide 10-25

The Effects of Economic Growth on the Price Level

Figure 10-6, Panel (a)

Slide 10-26

The Effects of Economic Growth on the Price Level

Figure 10-6, Panel (b)

Slide 10-27

The Effects of Economic Growth on the Price Level

Secular Deflation– An increase in LRAS will, ceteris paribus,

result in a decrease in the price level.

Avoiding Secular Deflation– If the AD curve shifts outward by the same

amount as the LRAS curve,the price level remains constant.

– The AD curve can be shifted outward by increasing the money supply.

Slide 10-28

Inflation Rates in the United States

Figure 10-7Source: Economic Report of the President;

Economic Indicators, various issues

Slide 10-29

Causes of Inflation:Supply-Side Inflation

Figure 10-8, Panel (a)

• When LRAS1 shifts to LRAS2, the price level rises from 120 to 140

• Inflation is caused by a decrease in LRAS.

Slide 10-30

Causes of Inflation:Demand-Side Inflation

Figure 10-8, Panel (b)

An increase in AD from AD1 to AD2 causes the price level to rise from 120 to 140. An increase in AD causes inflation.

Slide 10-31

Causes of Inflation:Economic Growth and Inflation

Figure 10-9Source: Economic Report of the President;

Economic Indicators, various issues