CHAPTER 9

Macroeconomic Equilibrium: Aggregate Demand and Supply

Summary

1.What factors affect aggregate demand?

  • Aggregate demand is the relation between aggregate expenditures and the price level. §2
  • Aggregate demand is the sum of consumption, investment, government spending, and net exports at alternative price levels. §2.a, 2.b, 2.c, 2.d
  • Aggregate expenditures change with changes in the price level because of the wealth effect, the interest rate effect, and the international trade effect. These cause a movement along the AD curve. §3.a.1, 3.a.2,3.a.3

2.What causes the aggregate demand curve to shift?

  • The aggregate demand (AD) curve shows the level of expenditures for real GDP at different price levels. §3.a.4
  • Because expenditures and prices move in opposite directions, the AD curve is negatively sloped. §3.a.4
  • The nonprice determinants of aggregate demand include expectations, foreign income and price levels, and government policy. §3.b.1, 3.b.2, 3.b.3

3.What factors affect aggregate supply?

  • The aggregate supply curve shows the quantity of real GDP produced at different price levels. §4

4.Why does the short-run aggregate supply curve become steeper as real GDP increases?

  • As real GDP rises and the economy pushes closer to capacity output, the level of prices must rise to induce increased production. §4.b.1

5.Why is the long-run aggregate supply curve vertical?

  • The long-run aggregate supply curve is a vertical line at the potential level of real GDP. The shape of the curve indicates that there is no effect of higher prices on output when an economy is producing at potential real GDP. §4.b.2

6.What causes the aggregate supply curve to shift?

  • 10. The nonprice determinants of aggregate supply are resource prices, technology, and expectations. §4.c.1, 4.c.2, 4.c.3

7.What determines the equilibrium price level and real GDP?

  • 11. The equilibrium price level and real GDP is at the intersection of the aggregate demand and aggregate supply curves. §5.a
  • 12. In the short run, a shift in aggregate demand establishes a new, but temporary, equilibrium along the short-run aggregate supply curve. §5.a
  • 13. In the long run, the short-run aggregate supply curve shifts so that changes in aggregate demand determine the price level, not the equilibrium level of output or real GDP. §5.b