Chapter 23:
Aggregate Demand and Supply Analysis

1.
2.
3.

Tp. Hồ Chí Minh - 2017

Trần Thị Ngọc Hạnh
Phạm Quang Thái
Nguyễn Phi Điệp


OUTLINE
1. Aggregate Demand and Shifts in Aggregate Supply Curves

2. Aggregate Supply and Shifts in Aggregate Supply Curves

3. Equilibrium in Aggregate Demand and Supply Analysis

4. Changes in Equilibrium: Aggregate Demand Shocks

5. Changes in Equilibrium: Aggregate Supply Shocks

6. AD/AS Analysis of Foreign Business Cycle Episodes

7. The Phillips Curve and the Short-Run Aggregate Supply Curve


PREVIEW

Aggregate Demand

2.Planned investment

1.Consumption

spending

expenditure

Aggregate
Demand

4. Net exports

3.Government
purchases


1. Aggregate Demand and Shifts in Aggregate
Supply Curves
Aggregate Demand
Aggregate

1.
2.

demand

is


Y

ad

= C + I + G +NX

(1)


1. Aggregate Demand and Shifts in Aggregate
Supply Curves


1. Aggregate Demand and Shifts in Aggregate
Supply Curves
Deriving the Aggregate Demand Curve

•

When the inflation rate rises (π ↑), the monetary authorities will raise the real interest rate (r↑) => keep
inflation from spiraling out of control.

•

Next, the resulting higher cost of financing purchases of new physical capital makes investment less profitable
and causes planned investment spending to decline (I↓).

•



1

AD2

Aggregate Output, Y

Figure 1: Leftward Shift in the Aggregate Demand Curve

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1. Aggregate Demand and Shifts in Aggregate
Supply Curves
Factors That Shift the Aggregate Demand Curve
7 basic factors (often referred to as demand shocks) can shift the aggregate demand curve to a new position:

(1)
(2)
(3)
(4)
(5)
(6)
(7)

Autonomous monetary policy,
Government purchases,
Taxes,

aggregate demand expenditure, and hence aggregate demand rises:

 

ad
↑ => Y ↑

Aggregate demand, therefore, rises at any given inflation rate and the aggregate demand curve shifts to the right as
in Figure 2.


1. Aggregate Demand and Shifts in Aggregate
Supply Curves
Factors That Shift the Aggregate Demand Curve
3. Taxes:. At any given inflation rate, an increase in taxes lowers disposable income, which will lead to lower
consumption expenditure and aggregate demand, so that aggregate demand falls:.

 

ad the aggregate demand curve shifts to the left as in Figure 1.
Aggregate demand falls at any given ↑
inflation
rate
=> ↓ =>
Y and
↓


1. Aggregate Demand and Shifts in Aggregate
Supply Curves

Supply Curves
Factors That Shift the Aggregate Demand Curve
6. Autonomous investment: When businesses become more optimistic, autonomous investment rises and they

 

spend more at any given inflation rate. Planned investment increases, and aggregate demand rises.

r↑ => I↑ => Y

 

ad

ad

↓

=> Ythe↑aggregate demand curve shifts to the right as in Figure
Aggregate demand rises at any given inflation rate, and
2.


1. Aggregate Demand and Shifts in Aggregate
Supply Curves
Factors That Shift the Aggregate Demand Curve
7. Financial frictions: When financial frictions increase, the real cost of borrowing increases, so that planned
investment spending falls at any given inflation rate and aggregate demand falls.

 


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1. Aggregate Demand and Shifts in Aggregate
Supply Curves
Factors That Shift the Aggregate Demand Curve
The conclusion: Aggregate demand increases at any given inflation rate, and the aggregate demand curve shifts to
the right when there is:

 

r↓ , , ↓ , , , , => Y

ad
↑

Conversely, the aggregate demand curve shifts to the left when any of these factors change in the opposite direction.


2. Aggregate Supply and Shifts in Aggregate Supply Curves
Aggregate Supply

The long-run aggregate supply curve.

Aggregate supply curve

The short-run aggregate supply curve


Potential output is where the economy settles in the long run for any inflation rate. Hence the long-

p

runaggregate supply curve (LRAS) is vertical at potential output, denoted by Y as drawn in Figure 3.