Money and Banking Lecture 8 Aggregate Demand and Supply Analysis Ch. 22

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Money and BankingLecture 8Aggregate Demand and
Supply AnalysisCh. 22

• Selcuk Caner
• Bilkent University

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Aggregate Demand

• The relationship between the quantity of
  aggregate output demanded and the price level
  when all other variables are held constant
• Based on the quantity theory of money
• Determined solely by the quantity of money
• Based on the components parts
• Consumption, investment, government spending and
  net exports

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Quantity Theory of Money Approach
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Behavior of Aggregate Demands Component Parts
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Factors that Shift Aggregate Demand

• An increase in the money supply shifts AD to the
  right because it lowers interest rates and
  stimulates investment spending
• An increase in spending from any of the
  components C, I, G, NX, will also shift AD to the
  right

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Aggregate Supply

• Long-run aggregate supply curve
• Determined by amount of capital and labor and the
  available technology
• Vertical at the natural rate of output generated
  by the natural rate of unemployment
• Short-run aggregate supply curve
• Wages and prices are sticky
• Generates an upward sloping SRAS as firms attempt
  to take advantage of short-run profitability when
  price level rises

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