Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

11
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C HAPTE R

Aggregate Demand and Aggregate Supply

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Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

AGGREGATE DEMAND Defined:

Amounts of Real Output Buyers Collectively Desire At Each Possible Price Level

Aggregate Demand Curve

Down Sloping Due To: Real-Balances Effect Interest-Rate Effect Foreign Purchases Effect

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Graphically

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AGGREGATE DEMAND CURVE

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Price level

AD
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Real domestic output, GDP

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CHANGES IN AGGREGATE DEMAND

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Aggregate Demand Can Increase

Price level

AD2 AD1
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Real domestic output, GDP

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CHANGES IN AGGREGATE DEMAND

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Price level

Aggregate Demand Can Increase or Decrease

AD3
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AD1

Real domestic output, GDP

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DETERMINANTS OF AGGREGATE DEMAND

Change in Consumer Spending

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Consumer Wealth Consumer Expectations Household Indebtedness Taxes

Change in Investment Spending

Real Interest Rates Expected Returns
Expected Future Business Conditions Technology Degree of Excess Capacity Business Taxes
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DETERMINANTS OF AGGREGATE DEMAND

Government Spending
Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Net Export Spending

National Income Abroad Exchange Rates

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AGGREGATE SUPPLY
Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

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Defined: Levels of Real Domestic Output At Each Possible Price Level Long-run Supply Curve Wages and Resource Prices Match Price Level Short-run Supply Curve Wages and Resource Prices Do Not Match Price Level
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AGGREGATE SUPPLY
Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS

Long Run
P
Price level

ASLR

Equilibrium & Changes in Equilibrium Appendix Key Terms

Long-run Aggregate Supply

Qf

Full-Employment

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Real domestic output, GDP

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AGGREGATE SUPPLY
Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS

Short Run
P
Price level Aggregate Supply Short-run

AS

Equilibrium & Changes in Equilibrium Appendix Key Terms

FullEmployment

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Qf
Real domestic output, GDP
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AGGREGATE SUPPLY
Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS

Changes in Aggregate Supply

AS3 AS1

Appendix Key Terms

Price level

Equilibrium & Changes in Equilibrium

Decrease In Aggregate Supply

AS2

Increase In Aggregate Supply

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Q
Real domestic output, GDP
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DETERMINANTS OF AGGREGATE SUPPLY

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Input Prices

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Domestic Resource Prices Labor Land Capital Prices of Imported Goods Market Power
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DETERMINANTS OF AGGREGATE SUPPLY

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Productivity
Productivity

Total Output
Total Inputs

Legal-Institutional Environment
Business Taxes and Subsidies Government Regulation
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EQUILIBRIUM AND CHANGES IN EQUILIBRIUM

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

P
Price Level

AS

100 92

Equilibrium Real Output

AD

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Q
Real Domestic Output, GDP
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INCREASES IN AD: DEMAND-PULL INFLATION

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

P
Price Level

AD1

AD2

AS

P2

P1

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Qf
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Q1 Q2

Real Domestic Output, GDP

DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

P
Price Level

AD2

AD1

AS

P1

a c

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Q1
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Qf

Real Domestic Output, GDP

DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

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Wage Contracts Morale, Effort, and Productivity Efficiency Wages Minimum Wage Menu Costs Fear of Price Wars
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DECREASES IN AS: COST-PUSH INFLATION

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

P
Price Level

AS2

AS1

P2

b a AD1

P1

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Q1 Qf Real Domestic Output, GDP

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Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS

With Price-Level Stability AS1 AS2 P

P3

INCREASES IN AS: FULL EMPLOYMENT

b

Appendix Key Terms

Price Level

Equilibrium & Changes in Equilibrium

P2 P1

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AD1

AD2

Q1 Q2 Q3 Real Domestic Output, GDP

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aggregate demandaggregate supply (ADAS) model aggregate demand real-balances effect interest-rate effect foreign purchases effect determinants of aggregate demand aggregate supply long-run aggregate supply curve
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short-run aggregate supply curve determinants of aggregate supply productivity equilibrium price level equilibrium real output efficiency wages menu costs

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END

CHAPTER 11 - Appendix
Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

RELATIONSHIP OF THE AGGREGATE DEMAND CURVE TO THE AGGREGATE EXPENDITURES MODEL

Derivation of the Aggregate Demand Curve from the Aggregate Expenditures Model

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Illustrated
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DERIVATION OF THE AGGREGATE DEMAND CURVE

Aggregate expenditures (billions of dollars) AE1 at P 1

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

1
2 3
0

AE2 at P 2 AE3 at P 3

Q3

Q2

Q1

Price level

P3 P2 P1
0

3 2

The Aggregate Demand Can Be Constructed

1
AD

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Real Domestic Output

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Q3 Q2

Q1

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SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE
Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Aggregate expenditures (billions of dollars)

AE2 at P 1
AE1 at P 1

Increase in Aggregate Expenditures

0 Q1 Q2

Price level

P1

Increase in Aggregate Demand

AD1
AD2
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0
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Real Domestic Output

Q1

Q2

SHIFTS IN THE AGGREGATE EXPENDITURES SCHEDULE & THE AGGREGATE DEMAND CURVE
Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Aggregate expenditures (billions of dollars)

AE2 at P 1
AE1 at P 1

Increase in Aggregate Expenditures

0 Q1 Q2

Price level

P1

Increase in Aggregate Demand

AD1
AD2
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0
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Real Domestic Output

Q1

Q2

Aggregate Demand Changes in AD Determinants of AD Aggregate Supply Determinants of AS Equilibrium & Changes in Equilibrium Appendix Key Terms

Coming next...
FISCAL POLICY
Chapter 12

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