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When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps. | Lecture Issues in economics today - Chapter 8 Chapter 8 Aggregate Demand and Aggregate Supply McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Chapter Outline Aggregate Demand Aggregate Supply Shifts in Aggregate Demand and Aggregate Supply Causes of Inflation Supply-Side Economics McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Aggregate Demand Aggregate Demand the amounts of real domestic output which domestic consumers businesses governments and foreign buyers collectively will desire to purchase at each possible price level McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Figure 1 Aggregate Demand PI AD RGDP McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Why Aggregate Demand is Downward Sloping Real Balances Effect Because higher prices reduce real spending power prices and output are negatively related. Foreign Purchases Effect When domestic prices are high we will export less to foreign buyers and we will import more from foreign producers. Therefore higher prices leads to less domestic output. Interest Rate Effect higher prices lead to inflation which leads to less borrowing and a lowering of RGDP McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Aggregate Supply Aggregate Supply the level of real domestic output available at each possible price level McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Figure 2 The Aggregate Supply Curve PI Classical Range Intermediate Range Keynesian Range RGDP McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. The Ranges of AS Keynesian Range Large amounts of unemployment make it so that increases in aggregate demand have no affect on wages or prices. Classical Range Full employment makes it so that increases in aggregate demand only increase wages or prices. Intermediate Range Some sectors of the economy reach full employment more quickly than
