Chapter 9 - Aggregate Demand and Aggregate Supply

The inverse relationship between all spending on domestic output and the aggregate price level of that output

Four general sources used to calculate real GDP

AD measures the sum of consumption spending by households, investment spending by firms, government purchases of goods and services, and net exports (exports minus imports).

Goods and services produced in other nations

Goods and services in the future

Money and financial assets

a downward-sloping AD curve

AD increases increasing real GDP

AD decreases decreasing real GDP

• Consumer Spending (C)

• Investment Spending (I)

• Government Spending (G)

• Net Exports (X-M)

  • Foreign incomes

  • Consumer tastes

  • Exchange rates

The relationship between the aggregated price level of all domestic output and the level of domestic output produced

The positive relationship between the level of domestic output produced and the aggregate price level of that output

The prices of goods and services are changing in their respective markets, but input prices have not been adjusted to those product market changes.

The curve is drawn as upward sloping.

Low production

Full employment

Nation’s productive capacity

The input prices have enough time to fully adjust to market forces. Here all product and input markets are balanced, and economy is at full employment (GDPf)

Asserts that the economy always gravitates toward full employment.

A vertical AS curve.

Aggregate price level or PL

Real output or real GDP

An economy-wide change in input (or factor) prices.

• Input prices

• Tax policy

• Deregulation

• Political or environmental phenomena

If input prices fall economy-wide, the short-run AS curve increases without changing the level of full employment

If these “supply-side taxes” are lowered, short-run AS shifts to the right.

When the regulation of industries restrict their ability to produce, the short-run AS likely increases

For larger nations, wars and natural disasters can decrease the short-run AS without permanently decreasing the level of full employment. For smaller ones, it could be a permanent decrease in the ability to produce.

• Availabity of resources

• Technology and productivity

• Policy incentives

A larger labor force, larger stock of capital, or more widely available natural resources can increase the level of full employment

Better technology raises the productivity of both capital and labor.

If policy provides large incentives to quickly find a job, full-employment real GDP rises. If government gives tax incentives to invest in capital or technology, GDPf rises.

economic growth

AS is a function of many factors that impact the production capacity of the nation. If these factors make it easier, or less costly, for a nation to produce, AS shifts to the right. If these factors make it more difficult, or more costly, for a nation to produce, AS shifts to the left.

Occurs when the quantity of real output demanded is equal to the quantity of real output supplied.

The amount by which full-employment GDP exceeds equilibrium GDP

The amount by which equilibrium GDP exceeds full employment GDP

This inflation is the result of stronger consumption from all sectors of AD as it continues to increase in the upward-sloping range of SRAS.

The price level may only slightly increase, while real GDP significantly increases and the unemployment rate falls.

The price level begins to rise and inflation is felt in the economy.

Inflation is quite significant and real GDP experiences minimal increases.

In the AD and AS model, a recession is typically described as falling AD with a constant SRAS curve. Real GDP falls far below full employment levels and the unemployment rate rises.

A sustained falling price level, usually due to severely weakened aggregate demand and a constant SRAS

Falling AD because it lowers real GDP and increases unemployment rate.

when the price level does not increase

when there’s no increase in the price level

When the SRAS curve shifts outward and the AD curve stays constant, the price level falls, real GDP increases and the unemployment rate falls

A situation in the macroeconomy when inflation and the unemployment rate are both increasing.

stagflation

an increase in SRAS

decrease in SRAS

Inflation, it lowers real GDP and increases unemployment rate.

An economy-wide phenomenon that affects the costs of firms and the position of the SRAS curve, either positively or negatively

It’s the result of higher productivity or lower energy prices

Usually occur when economy-wide input prices suddenly increase.

a decreased demand for many factors of production

price level and real GDP rises

A graphical device that shows the relationship between inflation and the unemployment rate. It shows the inverse relationship between inflation and unemployment rate.

Supply shocks shift the Phillips curve inward when SRAS shifts to the right and outward when SRAS shifts to the left.

vertical

The unemployment rate where cyclical unemployment is zero