Aggregate Demand & Supply

Lower prices... When price level falls...

stimulate exports & reduce imports Expenditures rise, shifting the aggregate expenditures downward

Long Run Aggregate Supply

the relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to maintain full employment. All input prices are flexible

Interest Rate Effect

Assuming a fixed money supply, an increase in the price level increases borrowing demand and in turn higher interest rates, which discourages consumer spending. Reduce quantity of Real GDP Demanded Results in downward sloping aggregate demand slope

Aggregate Expenditures determine the level of Real GDP

Aggregate Demand relates the price level to real GDP

Foreign Purchases Effect

If prices in US rise & prices in other nations stay the same, US consumers will buy more foreign products & imports will rise and exports will fall & will cause quantity of net exports to fall Results in downward sloping aggregate demand slope

Real Balance Effect

Price level increases reduce real value of cash balances which,in turn, reduces desired expenditures on the quantity of aggregate goods and services, all other things held constant. ( the opposite occurs if the price level declines Quantity of Real GDP falls Results in downward sloping aggregate demand slope

Determinants of Supply

Productivity: total amount of output produced with a given level of inputs-technology, education, & health of workers Resource Prices: resource cost rise, output decreases at every cost level. When price of oil rises increases the cost of producing and distributing goods and services (left) Social Institutions: Government, courts, police protection, & property rights

Inflation High

Real GDP Low

Aggregate Demand

The total or overall demand for all final goods and services produced in an economy. Includes the demand for goods and services as diverse as food, clothing, cars, healthcare, entertainment, and housing. We use Consumer Price Index (CPI) and GDP Price Index to represent the overall price level or average price of goods and services.

Graphing Aggregate Demand

Y axis: Price Level X axis: $ value of Real GDP Has a negative relationship between the price level and the quantity of real GDP or output demanded.

Equation: Aggregate Demand

Y= C + I + G + NX *Overall demand for Real GDP (Y) from consumption, gross investment, government purchases, and net exports.

Shifters for Aggregate Demand

change in consumption, investment, government purchases, net exports

Aggregate Supply

the total amount of goods and services produced in the economy available at all possible price levels Short run: supply slopes upward input prices are sticky, labor contracts commits firms to pay a certain wage over years.

Increase in aggregate expenditures shifts aggregate demand

to the right