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Chapter 12 – Aggregate Demand and Aggressive Supply
4/17/2014
Moore’s Law (look in book)
Aggregate Demand
• Real GDP desired at each price level
• Inverse relationship
o Households
o Firms
o Foreigners
o Government
o Spend less at higher price level
(if price level is lower than everyone wants to spend more money)
Changes in Aggregate Demand
-each variable changes the demand for certain products and output
• Determinants of aggregate demand
o Change in consumer spending (C)
o Change in investment spending (I)
§ Equipment, computers, cars, etc
...
S
...
S
...
4  million  Yens  
 
• dollar  appreciates  (becomes  stronger)  to  the  yen  
• 20,000  x  140  =  2
...
 Strong  dollar  hurts  exports
...
   
 
Aggregate  Supply  
Total  real  output  produced  at  each  price  level  
• Relationship  depends  on  time  horizon    
o Short  run  aggregate  supply:  inflexibility  
§ Upward  sloping    
§ Sticky  prices
...
   
 

*  In  macroeconomics,  the  long-­‐run  is  characterized  by…  
a)  horizontal  AS  
b)  vertical  AD  
c)  a  period  in  which  nominal  wages  have  fully  responded  to  changes  in  price  level  
d)  period  in  which  nominal  wages  are  fixed    
 
4/21/2015  
Changes  in  Aggregate  Supply  
Determinants  of  aggregate  supply  
• Change  in  input  prices  
• Changes  in  productivity  
• Change  in  legal-­‐institutional  environment    
o When  something  negatively  changes  it  will  shift  left,  positively  
changes  it  will  shift  right  
 
Input  Prices  
Domestic  resource  prices  
• Labor  (wages)  
• Capital    
• Land  and  natural  resources  (ex:  oil,  gas
...
 spend)  
o This  would  show  that  the  economy  is  overheating,  bubbles,  Fed  
increases  interest  rates  to  bring  aggregate  demand  back  to  where  it  
was
...
 This  made  housing  and  
cars  much  cheaper,  along  with  buying  factories  and  firm  costs  cheaper  
o This  brings  aggregate  demand  back    



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