Chapter 8 Aggregate Demand and Aggregate Supply
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Transcript of Chapter 8 Aggregate Demand and Aggregate Supply
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Chapter 8
Aggregate Demand andAggregate Supply
Issues In Economics Today, 4eGuell
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights res
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Chapter Outline
Aggregate Demand Aggregate Supply
Shifts in Aggregate Demand andAggregate Supply Causes of Inflation Supply-Side Economics How the Government can Influence (but
probably not control) the economy
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You Are Here
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Aggregate Demand
Aggregate Demand : the amounts of real domestic output which domesticconsumers, businesses,
governments, and foreign buyerscollectively will desire to purchase ateach possible price level
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Why Aggregate Demandis Downward Sloping
Real Balances Effect Because higher prices reduce real spending
power, prices and output are negatively related. Foreign Purchases Effect
When domestic prices are high, we will exportless to foreign buyers and we will import morefrom foreign producers. Therefore higher pricesleads to less domestic output.
Interest Rate Effect higher prices lead to inflation which leads to less
borrowing and a lowering of RGDP
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Aggregate Supply
Aggregate Supply : the level of realdomestic output available at each
possible price level
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Figure 2 The Aggregate Supply Curve
RGDP
PI
Keynesian Range
ClassicalRange
IntermediateRange
AS
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The Ranges of AS
Keynesian Range Large amounts of unemployment make it so that
increases in aggregate demand have no affect on
wages or prices. Classical Range Full employment makes it so that increases in
aggregate demand only increase wages or prices.
Intermediate Range Some sectors of the economy reach fullemployment more quickly than others.
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Variables that Shift Aggregate Demand
Taxes Interest Rates
Confidence Strength of the Dollar Government Spending
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Determinants of ADVariable GDP
ComponentC,I,G,X
Effect of an
increase on AD
Effect of a
decrease on AD
Taxes C,I Decrease soAD
Interest Rates C,I Decrease soAD
Confidence C,I Increase soAD =>
Decrease soAD
Decrease soAD
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Figure 3 AD Increases
AD
AS
AD
RGDP
PI
PI*
RGDP*
PI
RGDP
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Figure 4 AD Decreases
AD
AS
AD
RGDP
PI
PI*
RGDP*
PI
RGDP
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Variables that Shift AS
Input Prices Productivity
Government Regulation
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Determinants of AS
Variable Effect of anIncrease on AS
Effect of anDecrease on AS
Input Prices Decrease soAS
Increase soAS
Productivity Increase so
AS
Decrease so
ASGovernmentRegulation
Decrease soAS
Increase soAS
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Figure 5 Increase in AS
AS
AD
RGDP
PI
PI*
RGDP*
AS
PI
RGDP
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Figure 6 Decrease in AS
RGDP
AS
AD
PI
PI*
RGDP*
AS
PI
RGDP
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Causes of Inflation
Demand Pull Inflation : inflation causedby an increase in aggregate demand
Cost Push Inflation : inflation causedby a decrease in aggregate supply
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Government Influence:Aggregate Demand
Government can influence economicactivity with aggregate demand sidepolicies affecting: Taxes Government Spending Interest Rates
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Government Influence:Aggregate Supply
Government can influence economic activitywith aggregate supply side policies affecting input costs (labor and wage) reducing regulation Increase incentives to
Work Take Risks
The actions are call Supply Side Economics
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