AD The Model PL RGDP AD PL Price Level ALL prices in the economy Real Gross Domestic Product Dollar value of ALL domestically produced final goods and services adjusted for inflation AD Aggregate demand The total amount of goods and services people will purchase at ALL price levels ID: 1029368
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1. Aggregate Demand & Aggregate Supply Equilibrium
2. AD - The ModelPLRGDPADPL = Price Level. ALL prices in the economyReal Gross Domestic Product = Dollar value of ALL domestically produced final goods and services adjusted for inflationAD = Aggregate demand. The total amount of goods and services people will purchase at ALL price levels. Has the same components as GDP.AD = C + I + G + NX
3. The ModelWhy the downward slope?As price levels rise, so does demand for money to pay those price levels. As demand for money increases, interest rates increase. When IR increase, quantity of I and C decrease. (Interest Rate Effect)As price levels rise, REAL wealth decreases and people purchase less stuff. (Real Wealth Effect)As price levels rise, foreign goods are relatively cheaper, therefore increasing the quantity of imports at any one price level. (Net Export Effect)Slope is based on prices changes – not changes to C, I, G, NXPLRGDPAD
4. What changes AD?Any change in C, I, G, NXChanges taxes or government spendingResults from changes in Fiscal PolicyConsumer/Business expectationsAutonomous investment injections Income changes (for C, I, or G)Relative price change of foreign goodsInterest rates (change in C or I) Results from changes in Monetary Policy
5. AS - The ModelPLRGDPAS = Aggregate supply. The total amount of goods and services businesses will provide at ALL possible price levelsAS
6. AS - The Model – Not so fast!Aggregate Supply can change in the short run vs. the long run.PLRGDPASAn economy is at its trough, with under utilized resources (wasting resources). An economy is in transition, moving toward full employment.The economy has reached full employment. An increase in AD results in higher prices.
7. AS - The Model – (More Common)Aggregate Supply can change in the short run vs. the long run.PLRGDPLRASLRAS – Long run production point limited by productive resources; shows full employment.An economy is in transition, moving toward full employment.SRAS – Short run production points; may move beyond LRAS temporarily. (inflationary gap)SRAS
8. What changes AS?Any change in productive resourcesAS = K + L + C + E (land, labor, capital, entrepreneurship)Business regulations/taxes
9. Putting it togetherAggregate Supply can change in the short run vs. the long run.PLRGDPSRASEquilibrium price levelAlways use the SR equilibriumEquilibrium output Y* means full employmentAlways use the SR equilibriumLRASADPLY*