Ch 8' Aggregate Demand and Aggregate Supply

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Ch 8. Aggregate DemandandAggregate Supply
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Injections1. Consumption (C)2. Investment
(I)3. Government Spending (G)4. Exports
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Things that cause C to ?1. ? in price
levelsas prices fall we can afford to buy more
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2. ? IncomeRising incomes increase C3. ?
WealthRising wealth increases C
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4. ? TaxesLower taxes increases C5. ?
Availability of CreditEasy credit increases C
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6. ? in expectations about the futureconsumer
confidence is tracked by The Conference Board
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Consumer Confidence
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Things that cause I to ?1. ? interest
ratesinterest rates are the opportunity cost of
investing, so high interest rates lower investment
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2. ? business confidencebusinesses are more
likely to expand if they have a positive outlook
on the economy3. ? in priceslower prices of
capital increase I
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4. ? business taxesinvestment tax credits
encourage more investmentcapital gains taxes
discourage capital investment
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Things that cause G to ? ??????????????????????
???Governments are unpredictable
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Things that cause Net Exports (X-IM) to ?1. ?
in US pricesas US prices increase, exports fall
and imports rise
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2. ? foreign pricesas foreign prices increase,
US exports increase and imports decrease
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3. ? in US incomesas US incomes increase, so do
imports4. ? in foreign incomesas foreign
incomes increase, so do US exports
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Aggregate Demand (AD)The amount of real
domestic output that consumers, businesses,
governments, and foreign buyers collectively
desire at each price level
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Equilibrium ApplesPrice
D Quantity
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P AD CIGNX
RGDP
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An increase in C,I,G, or NX will cause AD to
increase
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P AD AD
CIGNX RGDP
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A decrease in C,I,G, or NX will cause AD to
decrease
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P AD
CIGNX AD RGDP
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P AS
RGDP
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Things that cause the AS curve to shift1. ? in
the cost of productionA decrease in the cost of
production will shift the AS curve to the
rightex energy prices decrease
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P AS AS
RGDP
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2. ? productivityAn increase in technology/
productivity will shift the AS curve to the
right
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3. ? government regulationsan increase in
government regulations will shift the AS curve to
the left
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P AS AS
RGDP
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P AS
AD CIGNX ?
F.E. RGDP