 |  Macroeconomics, 9/e Campbell R. McConnell,
University of Nebraska, Lincoln
Stanley L. Brue,
Pacific Lutheran University
Thomas P. Barbiero,
Ryerson University
Aggregate Demand and Aggregate Supply
Chapter HighlightsCHAPTER 9- For purposes of analysis we consolidate—or aggregate—the large number of individual product markets
into a composite market in which there are two variables—the price level and the level of real output. This
is accomplished through an aggregate demand– aggregate supply model.
- The aggregate demand curve shows the level of real output that the economy will purchase at each price
level.
- The aggregate demand curve is downsloping because of the wealth effect, the interest-rate effect, and the
foreign trade effect. The wealth effect indicates that inflation reduces the real value or purchasing power of
fixed-value financial assets held by households, causing them to retrench on their consumer spending. The
interest-rate effect means that, with a specific supply of money, a higher price level increases the demand
for money, raising the interest rate and reducing consumption and investment purchases. The foreign trade
effect suggests that an increase in one country's price level relative to other countries' reduces the net
exports component of that nation's aggregate demand.
- The determinants of aggregate demand are spending by domestic consumers, businesses, government, and
foreign buyers. Changes in the factors listed in Figure 9-2 cause changes in spending by these groups and
shift the aggregate demand curve.
- The aggregate supply curve shows the levels of the real output that businesses produce at various possible
price levels. The aggregate supply curve is upward sloping in the short run—a period during which input
prices remain fixed.
- The shape of the short-run aggregate supply curve depends on capacity utilization. The closer the economy
is to current capacity utilization, the steeper the aggregate supply curve. The more slack in the economy, the
flatter the aggregate supply curve becomes.
- Figure 9-4 lists the determinants of aggregate supply: input prices, productivity, and the legal-institutional
environment. A change in any one of these factors will change per-unit production costs at each level of output
and therefore alter the location of the aggregate supply curve.
- The intersection of the aggregate demand and aggregate supply curves determines an economy's equilibrium
price level and real GDP.
- Given an upward-sloping aggregate supply, rightward shifts of aggregate demand will increase both real
domestic output and the level of prices.
- Leftward shifts of aggregate supply lead to real output declines and the price level rises; rightward shifts
increase real output and lower the price level.
- In macroeconomics, the short run is a period in which nominal wages are fixed; they do not change in
response to changes in the price level. In contrast, the long run is a period in which nominal wages are fully
responsive to changes in the price level.
- The short-run aggregate supply curve is upsloping. Because nominal wages are fixed, increases in the price
level (prices received by firms) increase profits and real output. Conversely, decreases in the price level
reduce profits and real output. However, the long-run aggregate supply curve is vertical. With sufficient time
for adjustment, nominal wages rise and fall with the price level, moving the economy along a vertical aggregate
supply curve at the economy's full-employment output.
- A recessionary gap is the amount by which equilibrium GDP falls short of full-employment GDP. An inflationary
gap is the amount by which equilibrium GDP is above full-employment GDP.
Appendix- A change in the price level alters the location of the aggregate expenditures schedule through the real balances,
interest-rate, and foreign trade effects. The aggregate demand curve is derived from the aggregate expenditures
model by allowing the price level to change and observing the effect on the aggregate expenditures schedule and
thus on equilibrium GDP.
- With the price level held constant, increases in consumption, investment, and net export expenditures shift
the aggregate expenditures schedule upward and the aggregate demand curve to the right. Decreases in
these spending components reduce the opposite effects.
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2002 McGraw-Hill Higher Education