Economic Indicators: Economic Indicators Aggregate Supply and Aggregate Demand


Aggregate Supply and Aggregate Demand: Aggregate Supply and Aggregate Demand Aggregates Sum of all the individual parts in the economy Just like supply and demand in micro where it applies to a single product except that in macro, aggregate supply and demand is all of the products put together


Aggregate Demand: Aggregate Demand Aggregate Demand Total quantity of all goods and services in the entire economy that all citizens will demand at any single time Unlike Demand from micro though, Aggregate Demand is not always related to prices It is related to the price level from real GDP instead


Aggregate Demand: Aggregate Demand Aggregate Demand Curve Line showing the relationship between the aggregate quantity demanded and the average of all prices as measured by things like the GDP price deflator and CPI Still has an inverse relationship and slopes downward Inflation causes purchasing power to go down, therefore aggregate quantity demanded will move down on the line Deflation causes purchasing power to rise and therefore aggregate quantity demanded will shift up on the line


Aggregate Demand: Aggregate Demand Aggregate Demand Curve shifts If people spend more money instead of saving it then the whole curve will increase, or move to the right because spending would increase Higher taxes or people saving their money can cause it to decrease, or move to the left because spending would decrease


Aggregate Supply: Aggregate Supply Aggregate Supply Real domestic output of producers based on the rise and fall of the price level Aggregate Supply Curve Line showing the relationship between the aggregate quantity supplied and the average of all prices as measured by the implicit GDP price deflator and CPI Slopes up like micro Supply


Aggregate Supply: Aggregate Supply Aggregate Supply Curve shifts Shifts are usually tied to the costs of production, if the costs of production go down then the supply curve will increase and shift to the right If there are higher prices on imports, higher interest rates, or lower worker productivity then supply would decrease and shift to the left


Aggregate Supply and Aggregate Demand: Aggregate Supply and Aggregate Demand Putting the two together The same as micro supply and demand except that instead of the point the two lines meet being called equilibrium price, it is called equilibrium level instead


Aggregate Supply and Aggregate Demand: Aggregate Supply and Aggregate Demand Shifts Shifts in aggregate demand and supply signal changes in the economy If aggregate demand shifts to the left then real GDP is falling and the economy is possibly in a recession If aggregate supply shifts to the right then it means that there is an improvement in production ability


Recession and Depression: Recession and Depression Recession A decrease in total output that lasts for more than two or three consecutive quarters of the year Depression Typically marked by a steep fall in total output coupled with a high unemployment rate, with both of these factors lasting for more than one year


Recession and Depression: Recession and Depression At AD1 the economy is in a recession At AD2 the economy picks up and prices don’t increase because the economy had room to grow without spurring prices At AD3 real GDP does not change much because prices rose with the increase in demand


Inflation and Stagflation: Inflation and Stagflation Prices can change without demand changing Agricultural example during a drought to the right Because of the drought, supply falls to AS2 and real GDP falls This is called stagflation because a stagnant economy combines with inflation


Inflation and Stagflation: Inflation and Stagflation Demand-Pull Inflation Prices rise as the result of excessive business and consumer demand; demand increases faster than total supply, resulting in shortages that lead to higher prices; what happened with AD3 two slides earlier Cost-Push Inflation Higher wages and profits push up prices, what happened in the last slide with AS2