CHAPTERAggregate Demand and13Aggregate Supply AnalysisChapterOutlineandLearningObjectives13.1AggregateDemand13.2AggregateSupply13.3MacroeconomicEguilibriumin theLongRunand theShortRun13.4ADynamicAggregateDemandandAggregateSupplyModelAppendix:MacroeconomicSchools of Thought
1 Chapter Outline and Learning Objectives 13.1 Aggregate Demand 13.2 Aggregate Supply 13.3 Macroeconomic Equilibrium in the Long Run and the Short Run 13.4 A Dynamic Aggregate Demand and Aggregate Supply Model Appendix: Macroeconomic Schools of Thought CHAPTER 13 CHAPTER Aggregate Demand and Aggregate Supply Analysis
AggregateDemandandAggregate Supply ModelWehave now modeled long-run economic growth and also how realGDP is determine in the short run.Our new goal is to extend the model of the economy in the short run.By doing so, we will be able to understand why real GDP, the level ofemployment, and the price level fluctuate.: Our tool for doing this will be the aggregate demand andaggregate supply model; to build it up, we must determine howaggregate demand and aggregate supply are each formed.Aggregate demand and aggregate supply model: A model thatexplains short-run fluctuations in real GDP and the price level.2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 2 Aggregate Demand and Aggregate Supply Model We have now modeled long-run economic growth and also how real GDP is determine in the short run. Our new goal is to extend the model of the economy in the short run. By doing so, we will be able to understand why real GDP, the level of employment, and the price level fluctuate. • Our tool for doing this will be the aggregate demand and aggregate supply model; to build it up, we must determine how aggregate demand and aggregate supply are each formed. Aggregate demand and aggregate supply model: A model that explains short-run fluctuations in real GDP and the price level
ASneakPeekattheModelIn the short run, real GDP andPrice levelShort-run(GDPdeflator,the price level are determinedaggregate2009=100)supply,SRASby the intersection of theaggregate demand (AD)110curve...Aggregate demand (AD)curve: A curve that shows therelationship betweenthepriceAggregatedemand,ADlevel and the quantity of real0$17.0RealGDPGDP demanded by(trillions of2009 dollars)households, firms, and theFigure 13.1Aggregate demandgovernment.andaggregate supply...and the short-run aggregate supply (As) curve.Short-run aggregate supply (As) curve: A curve that shows therelationship in the short run between the price level and the quantityof real GDP supplied by firms2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 3 A Sneak Peek at the Model In the short run, real GDP and the price level are determined by the intersection of the aggregate demand (AD) curve. Aggregate demand (AD) curve: A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government. .and the short-run aggregate supply (AS) curve. Short-run aggregate supply (AS) curve: A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms. Aggregate demand and aggregate supply Figure 13.1
AggregateDemand13.1LEARNINGOBJECTIVEIdentifythedeterminantsofaggregatedemandanddistinguishbetweenamovement alongtheaggregate demand curve and a shift of the curve.@2015PearsonEducation,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 4 Aggregate Demand 13.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve
TheFourComponentsofReal GDPReal GDP has four components: consumption (C), investment ()government purchases (G), and net exports (NX):Y=C+I+G+NXGovernment purchases are generally determined by the decisions ofpolicymakers; but each of the others changes, depending on the pricelevel.Wewill examine each inturn.The wealth effect:howa change in theprice level affectsconsumption (C): Household consumption is most strongly determine by income, butit is also affected by wealth.Some household wealth is held in nominal assets; so as pricelevels rise,the real value of household wealthdeclines.Thisresults in less consumption.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 5 The Four Components of Real GDP Real GDP has four components: consumption (C), investment (I), government purchases (G), and net exports (NX): Y = C + I + G + NX Government purchases are generally determined by the decisions of policymakers; but each of the others changes, depending on the price level. We will examine each in turn. The wealth effect: how a change in the price level affects consumption (C) • Household consumption is most strongly determine by income, but it is also affected by wealth. • Some household wealth is held in nominal assets; so as price levels rise, the real value of household wealth declines. This results in less consumption