Chapter 12 - Aggregate demand and aggregate supply. This chapter introduces the concepts of aggregate demand and aggregate supply, explaining the shapes of the aggregate demand and aggregate supply curves and the forces that cause them to shift. | Chapter 12 Aggregate Demand and Aggregate Supply McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved This chapter introduces the concepts of aggregate demand and aggregate supply, explaining the shapes of the aggregate demand and aggregate supply curves and the forces that cause them to shift. Additionally, the equilibrium levels of prices and real GDP are considered. The chapter analyzes the effects of shifts in the aggregate demand and/or aggregate supply curves on the price level and size of real GDP. This is a “variable price–variable output” model unlike the previous chapter, which was an immediate-short-run model where prices were assumed fixed. As you will see, this chapter’s model can distinguish between the immediate short run, the short run, and the long run. Aggregate Demand Real GDP desired at each price level Inverse relationship Real balances effect Interest effect Foreign purchases effect 12- Aggregate demand is a schedule or curve that shows the various amounts of real domestic output that domestic and foreign buyers desire to purchase at each possible price level. The aggregate demand curve shows an inverse relationship between price level and real domestic output. (The explanation of the inverse relationship is not the same as for demand for a single product, which centered on substitution and income effects. Substitution effect doesn’t apply within the scope of domestically produced goods, since there is no substitute for “everything.” Income effect also doesn’t apply in the aggregate case, since income now varies with aggregate output.) The explanation of the inverse relationship between price level and real output in aggregate demand are explained by the following three effects. Real balances effect: When price level falls, the purchasing power of existing financial balances rises, which can increase spending. Interest rate effect: A decline in price level means lower interest rates that can . | Chapter 12 Aggregate Demand and Aggregate Supply McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved This chapter introduces the concepts of aggregate demand and aggregate supply, explaining the shapes of the aggregate demand and aggregate supply curves and the forces that cause them to shift. Additionally, the equilibrium levels of prices and real GDP are considered. The chapter analyzes the effects of shifts in the aggregate demand and/or aggregate supply curves on the price level and size of real GDP. This is a “variable price–variable output” model unlike the previous chapter, which was an immediate-short-run model where prices were assumed fixed. As you will see, this chapter’s model can distinguish between the immediate short run, the short run, and the long run. Aggregate Demand Real GDP desired at each price level Inverse relationship Real balances effect Interest effect Foreign purchases effect 12- Aggregate demand is a .
