1. Aggregate Demand and Aggregate Supply Presented By : Ghanshyam Gupta [email_address]

5. Figure 1 A Look At Short-Run Economic Fluctuations Billions of 1996 Dollars Real GDP (a) Real GDP $10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1965 1970 1975 1980 1985 1990 1995 2000 Copyright © 2004 South-Western

7. Figure 1 A Look At Short-Run Economic Fluctuations Billions of 1996 Dollars (b) Investment Spending $1,800 1,600 1,400 1,200 1,000 800 600 400 200 1965 1970 1975 1980 1985 1990 1995 2000 Investment spending Copyright © 2004 South-Western

9. Figure 1 A Look At Short-Run Economic Fluctuations Percent of Labor Force (c) Unemployment Rate 0 2 4 6 8 10 12 1965 1970 1975 1980 1985 1990 1995 2000 Unemployment rate Copyright © 2004 South-Western

15. Figure 2 Aggregate Demand and Aggregate Supply... Quantity of Output Price Level 0 Copyright © 2004 South-Western Aggregate supply Aggregate demand Equilibrium output Equilibrium price level

17. Figure 3 The Aggregate-Demand Curve... Quantity of Output Price Level 0 Copyright © 2004 South-Western Aggregate demand P Y Y 2 P 2 1. A decrease in the price level . . . 2. . . . increases the quantity of goods and services demanded.

24. Shifts in the Aggregate Demand Curve 0 P 1 Y 1 Quantity of Output Price Level Aggregate demand, D 1 D 2 Y 2

27. Figure 4 The Long-Run Aggregate-Supply Curve Quantity of Output Natural rate of output Price Level 0 Copyright © 2004 South-Western Long-run aggregate supply P 2 1. A change in the price level . . . 2. . . . does not affect the quantity of goods and services supplied in the long run. P

31. Figure 5 Long-Run Growth and Inflation Quantity of Output Price Level 0 Copyright © 2004 South-Western Y 1980 AD 1980 AD 1990 Aggregate Demand, AD 2000 Long-run aggregate supply, LRAS 1980 Y 1990 LRAS 1990 Y 2000 LRAS 2000 P 1980 1. In the long run, technological progress shifts long-run aggregate supply . . . 4. . . . and ongoing inflation. 3. . . . leading to growth in output . . . P 1990 P 2000 2. . . . and growth in the money supply shifts aggregate demand . . .

34. Figure 6 The Short-Run Aggregate-Supply Curve Quantity of Output Price Level 0 Copyright © 2004 South-Western Short-run aggregate supply 1. A decrease in the price level . . . 2. . . . reduces the quantity of goods and services supplied in the short run. Y P Y 2 P 2

41. Figure 7 The Long-Run Equilibrium Quantity of Output Price Level 0 Copyright © 2004 South-Western Natural rate of output Short-run aggregate supply Long-run aggregate supply Aggregate demand A Equilibrium price

42. Figure 8 A Contraction in Aggregate Demand Quantity of Output Price Level 0 Long-run aggregate supply Copyright © 2004 South-Western Short-run aggregate supply, AS Aggregate demand, AD A P Y AD 2 AS 2 1. A decrease in aggregate demand . . . 2. . . . causes output to fall in the short run . . . 3. . . . but over time, the short-run aggregate-supply curve shifts . . . 4. . . . and output returns to its natural rate. C P 3 B P 2 Y 2

45. Figure 10 An Adverse Shift in Aggregate Supply Quantity of Output Price Level 0 Long-run aggregate supply Copyright © 2004 South-Western Aggregate demand 3. . . . and the price level to rise. 2. . . . causes output to fall . . . 1. An adverse shift in the short- run aggregate-supply curve . . . Short-run aggregate supply, AS Y A P AS 2 B Y 2 P 2

48. Figure 11 Accommodating an Adverse Shift in Aggregate Supply Quantity of Output Natural rate of output Price Level 0 Long-run aggregate supply Aggregate demand, AD Copyright © 2004 South-Western Short-run aggregate supply, AS P 2 A P AS 2 3. . . . which causes the price level to rise further . . . 4. . . . but keeps output at its natural rate. 2. . . . policymakers can accommodate the shift by expanding aggregate demand . . . 1. When short-run aggregate supply falls . . . AD 2 C P 3