macro economics chapter07.ppt

Chapter 7 Aggregate demand and aggregate supply Learning objectives Introduce the concepts of aggregate demand and aggregate supply Distinguish between short-run and long-run aggregate supply Explain the shapes of the aggregate demand and aggregate supply curves Discuss the relationship that exists between the aggregate expenditures model and the aggregate demand curve Learning objectives (cont.) Discuss the non price-level factors that causethe aggregate demand and aggregate supply curves to shift Combine the aggregate demand and aggregate supply curves to provide a model of macroeconomic equilibrium Discuss how the aggregate demand–aggregate supply model may be used to analyse the circumstances outlined in Chapter 5 Learning objectives (cont.) Contrast demand-pull and cost-push inflation Discuss the reasons why the general level of prices is downwards ‘sticky’— the ratchet effect Explain the impact of price-level changes on the size of the multiplier Aggregate demand (AD) Represents the amount of goods and services that consumers, businesses, government and foreign buyers are willing and able to buy at various price levels AD curve The AD curve slopes downwards to the right due to: Interest-rate effect Real-balances effect (wealth effect) Foreign-purchases effect Aggregate demand curve Interest-rate effect Rising price level causes higher nominal interest rates, which causes reduction in certain kinds of consumption and investment spending — most importantly, investment spending Real-balances effect Also known as ‘wealth effect’ At a higher price level, the real value or purchasing power of the accumulated financial assets held by the public falls (real wealth falls), leading to a fall in consumption spending Foreign-purchases effect Higher domestic prices cause the relative price of foreign goods (local goods) to decrease (increase) This causes increased imports and decreased exports, resulting in a fall in net exports Deriving the AD curve Aggr