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Chapter 08 Aggregate Demand and Aggregate Supply

Chapter 08 Aggregate Demand and Aggregate Supply. Chapter Outline. Aggregate Demand Aggregate Supply Shifts in Aggregate Demand and Aggregate Supply Causes of Inflation Supply-Side Economics How the Government Can Influence (but probably not control) the Economy. Aggregate Demand.

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Chapter 08 Aggregate Demand and Aggregate Supply

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  1. Chapter 08Aggregate Demand and Aggregate Supply

  2. Chapter Outline • Aggregate Demand • Aggregate Supply • Shifts in Aggregate Demand and Aggregate Supply • Causes of Inflation • Supply-Side Economics • How the Government Can Influence (but probably not control) the Economy

  3. Aggregate Demand • Aggregate Demand: the amounts of real domestic output which domestic consumers, businesses, governments, and foreign buyers collectively will desire to purchase at each possible price level

  4. PI AD RGDP Figure 1 Aggregate Demand

  5. Why Aggregate Demand is 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 export less to foreign buyers and we will import more from foreign producers. Therefore higher prices leads to less domestic output. • Interest Rate Effect • higher prices lead to inflation which leads to less borrowing and a lowering of RGDP

  6. Aggregate Supply • Aggregate Supply: the level of real domestic output available at each possible price level

  7. AS PI RGDP Figure 2 The Aggregate Supply Curve Classical Range Intermediate Range Keynesian Range

  8. 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 full employment more quickly than others.

  9. Variables that Shift Aggregate Demand • Taxes • Interest Rates • Confidence • Strength of the Dollar • Government Spending

  10. Determinants of AD

  11. PI AS PI’ PI* AD’ AD RGDP* RGDP’ RGDP Figure 3 AD Increases

  12. PI AS PI* PI’ AD AD’ RGDP’ RGDP* RGDP Figure 4 AD Decreases

  13. Variables that Shift AS • Input Prices • Productivity • Government Regulation

  14. Determinants of AS

  15. PI AS AS’ PI* PI’ AD RGDP RGDP* RGDP’ Figure 5 Increase in AS

  16. PI AS’ AS PI’ PI* AD RGDP’ RGDP* RGDP Figure 6 Decrease in AS

  17. Causes of Inflation • Demand Pull Inflation: inflation caused by an increase in aggregate demand • Cost Push Inflation: inflation caused by a decrease in aggregate supply

  18. Government Influence: Aggregate Demand • Government can influence economic activity with aggregate demand side policies affecting: • Taxes • Government Spending • Interest Rates

  19. Government Influence: Aggregate Supply • Government can influence economic activity with 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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