Chapter 14:
Aggregate Demand and Aggregate Supply
Aggregate Demand – Aggregate Supply Model
The AD-AS model enables us to analyze changes in ________and _________ level simultaneously.
The AD-AS model provides keen insights on inflation, recession, unemployment, and economic growth.
LO: 14-1
Aggregate Demand – Aggregate Supply (AD-AS) model is the macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and level of real domestic output.
14-*
Aggregate Demand and Aggregate Demand Curve
LO: 14-1
Aggregate demand curve is a schedule that shows the total __________ of goods and services demanded at difference _________levels.
There is an __________relationship between the price level (as measured by the GDP price index) and real output demanded (real GDP).
Real Domestic Output, GDP
Price Level
AD
Aggregate
Demand
14-*
What would you expect the following on the change in AD?
EACH Hong Kong permanent resident aged 18 or over will get HK$6000 (S$978) and reductions of 75 per cent in salaries tax and tax under personal assessment, capped at HK$6000, said Hong Kong Financial Secretary John Tsang…
Straits Times ( 3/2/2011 12:55:53 AM -08:00 )
Changes in Aggregate Demand
LO: 14-1
Determinant:
Factor(s) of Determinant:
AD shifts:
Consumer Spending
Consumer wealth increases
Consumers’ real incomes rise
Household indebtedness rises
Tax increases
Investment Spending
Increases in real interest rate
Higher expected returns
Government Spending
Increase in government spending
Net export Spending
Rising national income abroad
Depreciation of the dollar
14-*
Shifts in Aggregate Demand Curve
Real Domestic Output, GDP
Price Level
AD1
________ in
Aggregate
Demand
AD3
AD2
Decrease in
Aggregate
Demand
LO: 14-1
14-*
Aggregate Supply
LO: 14-2
Aggregate supply curve is a schedule that shows the total quantity of goods and services supplied at difference price levels.
The aggregate supply curve in the short run and in the long run vary by degrees of wage adjustment.
14-*
Immediate Short Run Aggregate Supply
Real Domestic Output, GDP
Price Level
ASISR
Immediate Short Run
Aggregate Supply
LO: 14-2
14-*
In the immediate short run, output and input prices are _______, and the AS curve is _________
Short Run
Aggregate Supply
Real Domestic Output, GDP
Price Level
0
Qf
Aggregate Supply
(Short Run)
LO: 14-2
14-*
In the short run, output prices are ________while input prices are ________, thus the AS curve is positively sloped
Long Run
Aggregate Supply
Real Domestic Output, GDP
Price Level
ASLR
Long Run
Aggregate
Supply
14-*
In the long run, all prices are _______, economy is at the full employment (output is equal to potential), the AS curve is _________.
Changes in Aggregate Supply
LO: 14-2
Determinant:
Factor(s) of Determinant:
AS shifts:
Input Prices
Domestic resource prices rise
Prices of imported resources rise
Increased market power
Productivity
Increases in productivity
Legal-Institutional Environment
Higher business taxes
More government regulation
14-*
Shifts in Aggregate
Supply Curve
Real Domestic Output, GDP
Price Level
AS1
_______ in
Aggregate
Supply
AS3
AS2
________ in
Aggregate
Supply
LO: 14-2
14-*
Equilibrium Price Level and Real GDP
Equilibrium occurs at the price level that equalizes the amount of real output demanded and supplied.
_________________is the intersection of the aggregate demand curve and aggregate supply curve.
This intersection determines the equilibrium ________ level and equilibrium __________.
LO: 14-3
14-*
Equilibrium
Real Output
Demanded
(Billions)
Price Level
(Index Number)
Real Output
Supplied
(Billions)
$506
508
510
512
514
108
104
100
96
92
$513
512
510
507
502
Equilibrium Price Level and
Equilibrium Real GDP
LO: 14-3
14-*
Equilibrium
Real Domestic Output, GDP (Billions of Dollars)
Price Level
100
510
AD
AS
Equilibrium
LO: 14-3
14-*
Using AD-AS Model to Explain Inflation and Recession
When aggregate supply and aggregate demand change, inflation and recession can occur in the short run.
Demand-pull inflation occurs when __________________increases (AD curve shifts to the right).
LO: 14-4
14-*
Cost-push inflation occurs when costs of production rise (AS curve shifts to the _______)
Hong Kong’s consumer and food prices (excluding meals away from home) rose by and percent respectively in 2010. While a number of factors including strong internal demand have contributed to Hong Kong’s food inflation, China’s rising food prices and Hong Kong’s currency depreciation against those of its major food suppliers had the most significant bearing on Hong Kong’s food prices. China’s food prices surged by percent in 2010 and the Chinese government indicated that inflationary pressure remains for 2011.
.
Recession occurs when aggregate demand falls (AD curve shifts to the ________) and prices are sticky downwards
Ireland in the first quarter of 2008 reported a contraction in GDP of percent, its first economic contraction since it began reporting by quarter and first recorded contraction since 1983….
____________ Inflation
Real Domestic Output, GDP
Price Level
AD
AS
P1
P2
Q1
Qf
AD1
_________ in Aggregate Demand
LO: 14-4
14-*
___________ Inflation
Real Domestic Output, GDP
Price Level
AD
AS
P1
P2
Q1
Qf
__________ in Aggregate Supply
AS1
a
b
LO: 14-4
14-*
Recession
Real Domestic Output, GDP
Price Level
AD1
AS
P1
Q2
Qf
AD2
Decrease in Aggregate Demand
Creates a
__________
a
b
LO: 14-4
14-*
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