Aggregate Supply Demand Model Macroeconomic Analysis ASAD Model

Aggregate Supply & Demand Model Macroeconomic Analysis

AS/AD Model Purpose • Allows complex analysis of macroeconomic events & the effects on: – Unemployment, Inflation and GDP growth • Sample analysis from AS/AD model – What will happen in the Government lowers taxes – What will happen in the Federal Reserve ↑ interest rates

Aggregate Demand • Aggregate-demand curve (AD)- the demand curve for the entire economy of U. S. made goods – demand from households, firms, exports & government • 4 Components of AD : AD = C + I + G + NX Inflation = Price Level AD = C + I + G + (X-M) GDP adjusted for inflation

Shifts in AD Curve • Shifts arise from changes in any of the 4 Determinants of AD – Consumption – Investment AD = C + I + G + (X-M) – Government Purchases – Net Exports

Aggregate Supply Curve • Aggregate-supply curve (AS)- the entire supply curve of all goods & services produced in U. S. – quantity of goods & services all firms produce Price Level AS 1 You use the AS/AD model to predict the impact of Gov’t policy or other economic events -------- P 1 -------- E 1 Y 1 AD 1 Real GDP AD = C + I + G + NX

AS/AD Model Worksheet • See what you understand

Using AS/AD Model • How can you improve the current economy? Price Level Gov’t ↓ Taxes => consumer income ↑ AS 1 -------Y 1 -------------------- E 2 P 1 -------- E 1 P 2 Y 2 C ↑ => AD ↑ => R-GDP ↑ AD 2 AD 1 Real GDP AD = C + I + G + NX

Using AS/AD Model Price Level AS 1 E 2 -------- P 1 -------- E 1 Y 1 AD 1 Real GDP