LESSON 5 AD AND AS

• Aggregate Demand (AD)


  Sum of the quantities of goods and services demanded by households, firms, government and of the net exports demanded by foreigners
• Aggregate Demand Curve


  Plots the quantity of real GDP demanded against the price level
• Types of substitutes for the goods and services that make up real GDP


  • Money and financial assets
  • Goods and services in the future
  • Goods and services produced in the other countries
• Real Money Balances Effect


  Effect of a change in the quantity of real GDP demanded
• Intertemporal Substitution Effect


  Substitution of goods later or of services later for goods now
• International Substitution Effect


  Substitution of domestic goods and services for foreign goods and services
• Shifters of Aggregate Demand

  • Government policy
  • Interest rate
  • Money and wealth
  • International factors (foreign exchange rates, foreign prices, foreign income)
  • Expectations
  • Time lags
• Aggregate Demand decreases when

  • Government decreases spending or increases taxes
  • Interest rates rise
  • Money supply or wealth decreases
  • Exchange rate increases or foreign prices decreases or foreign income decreases
  • Expected inflation or expected profits decrease
• Aggregate Demand increases when

  • Government increases spending or decreases taxes
  • Interest rates fall
  • Money supply or wealth increases
  • Exchange rate decreases or foreign prices increase or foreign income increases
  • Expected inflation or expected profits increase
• Aggregate Supply


  Sum of the quantities of all final goods and services produced by all firms in the economy, measured as real gross domestic products (GDP)
• Macroeconomic Short-Run


  A period over which the prices of goods and services change in response to changes in demand and supply but wages and possibly other input prices, DO NOT CHANGE
• Macroeconomic Long-Run


  Period sufficiently long for all prices and wage rates to have adjusted to any disturbance so that the quantities demanded and supplied are equal in all markets (goods and services, labor markets)
• Short-Run Aggregate Supply


  Relationship between the aggregate quantity of final goods and services (real GDP) supplied and the price level (the GDP deflator), holding everything else constant
• Ranges of Short-Run Aggregate Supply

  • Depression range
  • Intermediate range
  • Physical limit range
• Factors that affect Short-Run Aggregate Supply

  • Wages Rates
  • Interest Rate
• Long-Run Aggregate Supply Curve


  Plots the relationship between the quantity of real GDP supplied and the price level when wage rates change along with the price level to achieve full employment
• Changes in both Long-Run Aggregate Supply and Short-Run Aggregate Supply

  • The labor force
  • The capital stock
  • The availability of raw materials
  • Technology
  • Incentives
• Labor Force


  Larger the labor force, the larger is the quantity of the goods and services produced
• Capital Stock


  Larger the stock of plant and equipment, the more productive is the labor force and the greater is the labor force and the greater is the output that it can produce
• Availability of Raw Materials


  Discovery of new and easily accessed raw materials lower their real cost and increases output
• Technology


  Influences aggregate supply in two distinct ways: one positive and permanent, the other negative but temporary
• Incentives


  Provide an incentive to greater capital accumulation and, other things being equal, increase aggregate supply
• Aggregate Supply decreases and both curves shift to the left when

  • Labor force decreases
  • Capital stock decreases
  • Raw materials become less available or most costly
  • Technological changes increases the rate of job creation and destruction
  • Incentives to work and invest in new plant and equipment are not strengthened
• Aggregate Supply increases and both curves shift to the right when

  • The labor force increases
  • Capital stock increases
  • Raw materials become more available or less costly
  • Technological change increases the productivity of labor and capital
  • Incentives to work and invest in new plant and equipment are strengthened