1.1 The concept of aggregate demand and aggregate supply
The aggregate-demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level.
The aggregate-supply curve shows the quantity of goods and services that firms produce and sell at each price level.
Comparison with the concept of Loanable Funds
The supply of loanable funds comes from those people who have some extra income they want to save and lend out.
The demand for loanable funds comes from households and firms who wish to borrow to make investments.
1.2 Why the aggregate-demand curve is downsloping? A fall in the price level: -> Real wealth rises -> Interest rates fall -> The exchange rate depreciates.
These effects stimulate spending on consumption, investment, and net exports. Increased spending on these components of output means a larger quantity of goods and services demanded.
1.3 General rule of the movement of the aggregate-demand curve
Movement
Factor
Events
General Situation
To the left
Consumption
Stock markets
Reduce
crash;
consumption
Government raises tax. To the left
Investment
Pessimistic
Reduce Investment
Expectation; Repeal of an investment tax credit;
To the left
To the left
Government
Reduce purchases
Reduce
Purchases
of new weapons
Government
systems;
Purchases
Europe Recession
Reduce Net
Net Exports
Exports
Similarly, if there are events that are going to increase C, I, G, and NX, then aggregate-demand curve will move to the right.
1.4 Long-Run Aggregate-Supply Curve In the long run, the quantity of output supplied depends on the economy’s quantities of labor, capital, and natural resources and on the technology for turning these inputs into output. The quantity supplied does not depend on the overall price level. As a result, the long-run aggregate-supply curve is vertical at the natural rate of output.
1.5 General rule of the movement of the long-run aggregate-supply curve Movement
Factor
Events
General Situation
To the left
Labor
Worker go abroad;
Decrease quantity
Raise the
of labor
minimum wage To the left
Capital
Decrease in the
Decrease quantity
number of
of Capital
machines; Decrease in the number of college degrees To the left
To the left
Weather makes
Decrease quantity
farming more
of natural
difficult
resources
Technological
New regulations to
Decrease quantity
Knowledge
use some
of technological
production
knowledge
Natural Resources
methods
Similarly, if there are events that are going to increase labor, capital, natural resources and technological knowlege, then long-run aggregate-supply curve will move to the right.
1.6 Why the short-run aggregate-supply curve is upward sloping?
This positive relationship could be due to misperceptions, sticky wages, or sticky prices. Over time, perceptions, wages, and prices adjust, so this positive relationship is only temporary.
1.7 General rule of the movement of the short-run aggregate-supply curve Movement
Factor
Events
General Situation
To the left
Labor
Worker go abroad;
Decrease quantity
Raise the
of labor
minimum wage To the left
Capital
Decrease in the
Decrease quantity
number of
of Capital
machines; Decrease in the number of college degrees To the left
Natural Resources
Weather makes
Decrease quantity
farming more
of natural
difficult
resources
To the left
Technological
New regulations to
Decrease quantity
Knowledge
use some
of technological
production
knowledge
methods To the left
Expectation
An increase in the
Decrease the
expected price
quantity of goods
level
and services supplied
Similarly, if there are events that are going to increase labor, capital, natural resources and technological knowlege, or reduce the expected price level, then short-run aggregate-supply curve will move to the right.
