TAILIEUCHUNG - Lecture Economics: Chapter 28 - Dean Karlan, Jonathan Morduch

Chapter 28: Aggregate demand and aggregate supply. After studying this chapter you will be able to understand: What the components of aggregate demand (AD) are and why the AD curve slopes downward? What the components of aggregate supply (AS) are and why the AS curve slopes upward? What factors shift AD and AS? What differences exist between the short and long run? | Chapter 28 Aggregate Demand and Aggregate Supply © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • What the components of aggregate demand (AD) are and why the AD curve slopes downward. • What the components of aggregate supply (AS) are and why the AS curve slopes upward. • What factors shift AD and AS. • What differences exist between the short and long run. • What the short‐ and long‐run effects of shifts in AD and AS are. • What policy options are available to counteract shocks. © 2014 by McGraw‐Hill Education 2 Tying it all together • The last three chapters have focused separately on three features of the economy: 1. Output (GDP). 2. Prices. 3. Unemployment. • These factors do not fluctuate independently. • A demand and supply model for the macroeconomy would be useful. • The model of aggregate demand and aggregate supply shows how output, prices, and employment are all tied together as part of a single economic equilibrium. © 2014 by McGraw‐Hill Education 3 1 Aggregate demand • Aggregate demand is equal to GDP, or AD = GDP = C + I + G + NX. • The aggregate demand curve shows the relationship between the overall price level in the economy and output. Price level 2. increases the amount of goods and services demanded. P1 1. A decrease in the price level P2 • We are interested in what happens when the prices of all goods go up or down. • Price changes are measured by the price index or inflation. Aggregate demand Y1 Y2 Output © 2014 by McGraw‐Hill Education 4 Why does the AD curve slope downward? • Why the AD curve slopes downward is due to each component of AD. 1. Consumption (C): • As prices rise, people reduce consumption because their real wealth decreases. – This is called the wealth effect. 2. Investment (I): • As prices rise, interest rates rise. • .

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