Aggregate Demand Aggregate Supply Equilibrium ShortRun Equilibrium and

Aggregate Demand & Aggregate Supply Equilibrium Short-Run Equilibrium and Changes in AS AD

AD - The Model PL PL = Price Level. ALL prices in the economy AD = Aggregate demand. The total amount of goods and services people will purchase at ALL price levels. Has the same components as GDP. AD = C + I + G + NX AD RGDP Real Gross Domestic Product = Dollar value of ALL domestically produced final goods and services adjusted for inflation Short-Run Equilibrium and Changes in AS AD

The Model PL AD RGDP Why the downward slope? • As price levels rise, so does demand for money to pay those price levels. As demand for money increases, interest rates increase. When IR increase, quantity of I and C decrease. (Interest Rate Effect) • As price levels rise, REAL wealth decreases and people purchase less stuff. (Real Wealth Effect) • As price levels rise, foreign goods are relatively cheaper, therefore increasing the quantity of imports at any one price level. (Net Export Effect) • Slope is based on prices changes – not changes to C, I, G, NX Short-Run Equilibrium and Changes in AS AD

What changes AD? • Any change in C, I, G, NX • Changes taxes or government spending • Results from changes in Fiscal Policy • Consumer/Business expectations • Autonomous investment injections • Income changes (for C, I, or G) • Relative price change of foreign goods • Interest rates (change in C or I) • Results from changes in Monetary Policy Short-Run Equilibrium and Changes in AS AD

AS - The Model PL AS AS = Aggregate supply. The total amount of goods and services businesses will provide at ALL possible price levels RGDP Short-Run Equilibrium and Changes in AS AD

AS - The Model – Not so fast! Aggregate Supply can change in the short run vs. the long run. AS PL An economy is at its trough, with under utilized resources (wasting resources). The economy has reached full employment. An increase in AD results in higher prices. An economy is in transition, moving toward full employment. RGDP Short-Run Equilibrium and Changes in AS AD

AS - The Model – (More Common) Aggregate Supply can change in the short run vs. the long run. PL LRAS An economy is in transition, moving toward full employment. SRAS – Short run production points; may move beyond LRAS temporarily. (inflationary gap) LRAS – Long run production point limited by productive resources; shows full employment. Short-Run Equilibrium and Changes in AS AD RGDP

What changes AS? • Any change in productive resources • AS = K + L + C + E (land, labor, capital, entrepreneurship) • Business regulations/taxes Short-Run Equilibrium and Changes in AS AD

Putting it together Aggregate Supply can change in the short run vs. the long run. PL LRAS SRAS PL Equilibrium price level • Always use the SR equilibrium AD Y* Equilibrium output • Y* means full employment • Always use the SR equilibrium Short-Run Equilibrium and Changes in AS AD RGDP