Figure 1a: Potential and Actual Real GDP, 1960-2001

1
Figure 1a Potential and Actual Real GDP,
1960-2001
2
Figure 1 The Two-Way Relationship Between
Output and the Price Level
3
Figure 2a Deriving the Aggregate Demand Curve
(a)
Ms
H
E
500
4
Figure 2b/c Deriving the Aggregate Demand Curve
(c)
(b)
Price Level
AEr 6
H
AEr 9
140
E
Aggregate Expenditure ( Trillions)
E
100
H
AD
Real GDP ( Trillions)
Real GDP ( Trillions)
10
6
6
10
5
Figure 3 A Spending Shock Shifts the AD Curve
(a)
(b)
Price Level
AE2
AE1
H
Real Aggregate Expenditure ( Trillions)
100
H
E
E
AD1
AD2
Real GDP ( Trillions)
Real GDP ( Trillions)
10
13.5
10
13.5
6
Figure 4a Effects of Key Changes on the
Aggregate Demand Curve
(a)
Price Level
P3
P1
P2
AD
Real GDP
Q3
Q1
Q2
7
Figure 4b Effects of Key Changes on the
Aggregate Demand Curve
(b)
Price Level
AD2
AD1
Real GDP
8
Figure 4c Effects of Key Changes on the
Aggregate Demand Curve
(c)
Price Level
decreases
AD1
AD2
Real GDP
9
Figure 5 The Aggregate Supply Curve
Price Level
AS
130
B
100
A
80
C
Real GDP ( Trillions)
13.5
10
6
10
Movements Along the AS Curve

• When a change in output causes price level to
  change, we move along economys AS curve
• What happens in economy as we make such a move?
• As we move upward along AS curve, we can
  represent what happens as follows

11
Figure 6 Shifts of the Aggregate Supply Curve
AS2
Price Level
AS1
L
140
100
A
Real GDP ( Trillions)
10
12
Figure 7a Effects of Key Changes on the
Aggregate Supply Curve
(a)
Price Level
AS
P3
P1
P2
Real GDP
Q2
Q1
Q3
13
Figure 7b Effects of Key Changes on the
Aggregate Supply Curve
(b)
AS2
Price Level
AS1
Real GDP
14
Figure 7c Effects of Key Changes on the
Aggregate Supply Curve
(c)
Price Level
AS1
AS2
Real GDP
15
Figure 8 Short-Run Macroeconomic Equilibrium
AS
Price Level
B
140
E
100
F
AD
Real GDP ( Trillions)
10
6
14
16
Figure 9 The Effect of a Demand Shock
AS
Price Level
130
H
115
J
100
E
AD2
AD1
Real GDP( Trillions)
10
13.5
12.5
17
An Increase in Government Purchases

• Can summarize impact of price-level changes
• When government purchases increase, horizontal
  shift of AD curve measures how much real GDP
  would increase if price level remained constant
• But because price level rises, real GDP rises by
  less than horizontal shift in AD curve

18
An Decrease in Government Purchases
19
An Increase in the Money Supply

• Although monetary policy stimulates economy
  through a different channel than fiscal policy
• Once we arrive at AD and AS diagram, two look
  very much alike
• Can represent situation as follows

20
Figure 10 The Long-Run Adjustment Process
Price Level
AS2
AS1
P4
K
J
P3
P2
H
P1
E
AD2
AD1
YFE
Y3
Y2
Real GDP
21
Demand Shocks Adjusting to the Long Run

• For a positive demand shock that shifts AD curve
  rightward, self-correcting mechanism works like
  this

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Figure 11 Long-Run Adjustment After A Negative
Demand Shock
Price Level
AS1
AS2
P1
E
P2
N
P3
M
AD1
AD2
Real GDP
YFE
Y2