Informative slides for students :)

2. GROUP MEMBERS
 MUHAMMAD SHAHROZE ILYAS
 MUBEEN ABDUL SHAKOOR
 ADEEL ASIF
 MUHAMMAD FAHAD KHAN

3. AGGREGATE-DEMAND
 In economics aggregate demand is
the total demand for final goods
and services in the economy at a
given time and price level.
 Aggregate demand is the gross
domestic product of a country
when inventory levels are static

4. Aggregate Demand
 The sum of all expenditure in the economy over a
period of time
 Macro concept – WHOLE economy
 Formula:
AD = C+I+G+(X-M)
◦ C= Consumption Spending
◦ I = Investment Spending
◦ G = Government Spending
◦ (X-M) = difference between spending on imports
and receipts from exports (Balance of Payments)

5. Aggregate Demand –Key
Variables
 Consumption Expenditure
 Investment Expenditure
 Government Expenditure
 Import Spending
 Export Earning

6. Consumption Expenditure
 Exogenous factors affecting consumption:
◦ Tax rates
◦ Incomes – short term and expected income over lifetime
◦ Wage increases
◦ Credit
◦ Interest rates
◦ Wealth
 Property
 Shares
 Savings
 Bonds

7. Investment Expenditure
 Spending on:
◦ Machinery
◦ Equipment
◦ Buildings
◦ Infrastructure
 Influenced by:
◦ Expected rates of return
◦ Interest rates
◦ Expectations of future sales
◦ Expectations of future inflation rates

8. Government Spending
 Defence
 Health
 Social Welfare
 Education
 Foreign Aid
 Regions
 Industry
 Law and Order

9. Import Spending (negative)
 Goods and services bought from
abroad – represents an outflow of
funds from the country (reduces AD)

10. Export Earnings (Positive)
 Goods and services sold abroad –
represents a flow of funds into the
country (raises AD)

11. Aggregate Demand Curve
 The aggregate
demand (AD)
curve is a curve
that shows the
negative
relationship
between aggregate
output (income)
and the price level

12. Deriving the Aggregate Demand
Curve
 To derive the aggregate demand
curve, we examine what happens to
aggregate output (income) (Y) when
the price level (P) changes, assuming
no changes in government spending
(G), net taxes (T), or the monetary
policy variable (Ms).

13. Deriving the Aggregate Demand
Curve
 The AD curve is
not a market
demand curve, and
it is not the sum of
all market demand
curves in the
economy. It is a
more complex
concept.

14. Aggregate Demand Curve
 Aggregate demand falls when the price
level increases because the higher price level
causes the demand for money to rise, which
causes the interest rate to rise.
 It is the higher interest rate that causes
aggregate output to fall.
 At all points along the AD curve, both the
goods market and the money market are in
equilibrium.

15. Reasons why AD is downward
sloping
 The consumption link: The
decrease in consumption brought
about by an increase in the interest
rate contributes to the overall
decrease in output.
 The real wealth effect, or real
balance, effect: When the price level
rises, there is a decrease in
consumption brought about by a
change in real wealth.

16. Shifts in AD
 Changes in
Governmental
Policies
 Changes in Monetary
Policy
 Changes in
Expectations of
Households and
Firms

17. Factors that Effect Aggregate
Demand
 1. Income
 2. Wealth
 3. Population
 4. Interest rates
 5. Credit availability
 6. Government demand
 7. Taxation
 8. Foreign demand
 9. Investment
 10. Expectations
(a) Inflationary
(b) Income
(c) Wealth
(d) Interest rate
(+)
(+)
(+)
(–)
(+)
(+)
(–)
(+)
(+)
(+)
(+)
(+)
(+)

18. AGGREGATE
SUPPLY

19. AGGREGATE
SUPPLY
Aggregate supply is the total
supply of goods and services
in an economy.

20. AGGREGATE SUPPLY
CURVE
Curve shows relation between
aggregate quantity of output supplied by
all the firms in an economy and overall
price level.
It is not a market supply curve ,and it is
not simple sum of all individual supply
curves.
Rather than an aggregate supply curve,
what does exist is a “price/output
response” curve

21. AGGREGATE SUPPLY IN
THE SHORT RUN
In the short run, the
aggregate supply curve
(the price/output
response curve) has a
positive slope

22. AGGREGATE SUPPLY IN THE
SHORT RUN
Macroeconomists focus on whether or
not the economy as a whole is operating
at full capacity.
As the economy approaches maximum
capacity, firms respond to further
increases in demand only by raising
prices.

23. AGGREGATE SUPPLY IN THE
SHORT RUN
At low levels of
aggregate output the
curve is fairly flat.
As economy
approaches capacity, the
curve becomes nearly
vertical.
At capacity, the curve
is vertical.

24. The Response of Input Prices to
Changes in the Overall Price
Level
There must be a lag between
changes in input prices and changes
in output prices, otherwise the
aggregate supply (price/output
response) curve would be vertical.
Wage rates may increase at exactly
the same rate as the overall price level
if the price-level increase is fully
anticipated. Most input prices,
however, tend to lag increases in
output prices.

25. WHY IS THE SHORT RUN
CURVE UPWARD SLOPING?
Short-run aggregate supply curve slopes
upward because:
 Contracts make some wages and
prices “sticky.”
 Firms are often slow to adjust wages.
 Menu costs make some prices sticky

26. Shifts of the Short-Run
Aggregate Supply Curve
A decrease in aggregate
supply
An increase in aggregate
supply

27. Bad weather, natural
disasters, destruction
from wars
Good weather
Public policy
waste and inefficiency
over-regulation
Public policy
supply-side policies
tax cuts
deregulation
Stagnation
capital deterioration
Economic growth
more capital
more labor
technological change
Higher costs
higher input prices
higher wage rates
Lower costs
lower input prices
lower wage rates
Shifts to the Left
Decreases in Aggregate Supply
Shifts to the Right
Increases in Aggregate Supply
Factors That Shift the Aggregate Supply Curve
Shifts of the Short-Run
Aggregate Supply Curve

28. The Equilibrium Price Level
AD represents money
and goods market in
equilibrium.
AS represents
price/output decisions of
all firms in ecomony.
P0 and Y0 correspond to
equilibrium in the goods
market and the money
market and a set of
price/output decisions on
the part of all the firms in
the economy.

29. The Long-Run
Aggregate Supply Curve
Costs lag behind
price-level changes in
the short run, resulting
in an upward-sloping
AS curve.
 Costs and the price
level move in tandem
in the long run, and
the AS curve is
vertical.

30. The Long-Run
Aggregate Supply Curve
Output can be
pushed above
potential GDP by
higher aggregate
demand. The
aggregate price level
also rises.

31. The Long-Run
Aggregate Supply Curve
When output is
pushed above
potential, there is
upward pressure on
costs, and this causes
the short-run AS curve
to the left.
Costs ultimately
increase by the same
percentage as the
price level, and the
quantity supplied ends
up back at Y0.

32. The Long-Run
Aggregate Supply Curve
Y0 represents
the level of
output that can
be sustained in
the long run
without
inflation. It is
also called
potential
output or
potential GDP.

33. THANK YOU