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Aggregate Demand,
Aggregate Supply,
and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair
The Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• Aggregate demand
is the total demand for
goods and services in
the economy.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 2 of 47
Deriving the Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 3 of 47
Deriving the Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
P M d r I AE Y
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 4 of 47
Deriving the Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• The aggregate
demand (AD) curve
is a curve that shows
the negative
relationship between
aggregate output
(income) and the
price level.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 5 of 47
The Aggregate Demand Curve:
A Warning
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 6 of 47
The Aggregate Demand Curve:
A Warning
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 7 of 47
The Aggregate Demand Curve:
A Warning
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 8 of 47
Other Reasons for a Downward-
Sloping Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 9 of 47
Other Reasons for a Downward-
Sloping Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 10 of 47
Aggregate Expenditure
and Aggregate Demand
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
Y=C+I+G
equilibrium condition
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 11 of 47
Shifts of the Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• An increase in the
quantity of money
supplied at a given
price level shifts the
aggregate demand
curve to the right.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 12 of 47
Shifts of the Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• An increase in
government purchases
or a decrease in net
taxes shifts the
aggregate demand
curve to the right.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 13 of 47
Shifts of the Aggregate Demand Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 14 of 47
The Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 15 of 47
The Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 16 of 47
The Aggregate Supply Curve:
A Warning
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 17 of 47
The Aggregate Supply Curve:
A Warning
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 18 of 47
The Aggregate Supply Curve:
A Warning
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 19 of 47
The Aggregate Supply Curve:
A Warning
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 20 of 47
Aggregate Supply in the Short Run
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 21 of 47
Aggregate Supply in the Short Run
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• At low levels of
aggregate output, the
curve is fairly flat. As
the economy
approaches capacity,
the curve becomes
nearly vertical. At
capacity, the curve is
vertical.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 22 of 47
Aggregate Supply in the Short Run
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 23 of 47
Output Levels and
Price/Output Responses
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 24 of 47
The Response of Input Prices to
Changes in the Overall Price Level
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 25 of 47
The Response of Input Prices to
Changes in the Overall Price Level
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 26 of 47
Shifts of the Short-Run
Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 27 of 47
Shifts of the Short-Run
Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 29 of 47
The Equilibrium Price Level
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• P0 and Y0 correspond to
equilibrium in the goods
market and the money
market and a set of
price/output decisions
on the part of all the
firms in the economy.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 30 of 47
The Long-Run
Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 31 of 47
The Long-Run
Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 32 of 47
The Long-Run
Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 33 of 47
The Long-Run
Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 34 of 47
Aggregate Demand, Aggregate
Supply, and Monetary and Fiscal Policy
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 36 of 47
Long-Run Aggregate
Supply and Policy Effects
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 37 of 47
The Simple “Keynesian”
Aggregate Supply Curve
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 38 of 47
Causes of Inflation
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 39 of 47
Causes of Inflation
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 40 of 47
Cost-Push, or Supply-Side Inflation
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• Stagflation occurs
when output is falling at
the same time that
prices are rising.
• One possible cause of
stagflation is an
increase in costs.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 41 of 47
Cost-Push, or Supply-Side Inflation
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 42 of 47
Expectations and Inflation
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 43 of 47
Money and Inflation
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• Hyperinflation is a
period of very rapid
increases in the price
level.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 44 of 47
Money and Inflation
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
• An increase in G with
the money supply
constant shifts the AD
curve from AD0 to
AD1. This leads to an
increase in the interest
rate and crowding out
of planned investment.
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 45 of 47
Money and Inflation
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 46 of 47
Review Terms and Concepts
CHAPTER 13: Aggregate Demand, Aggregate Supply, and Inflation
© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 47 of 47