Equilibrium occurs at the price level that equalizes the amount of real output demanded and supplied
1
Real OutputDemanded(billions)
Price Level(indexnumber)
Real OutputSupplied(billions)
$506 108 513
508 104 512
510 100 510
512 96 505
514 92 502
©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
Real domestic output, GDP(billions of dollars)
Pri
ce level (i
nd
ex n
um
bers
)
100
92
502 510 514
ab
AD
ASReal
Output Demanded(Billions)
Price Level(Index
Number)
Real Output
Supplied(Billions)
$506 108 $513
508 104 512
510 100 510
512 96 507
514 92 502
0
2©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
For any initial increase in aggregate demand, the resulting increase in real output will be smaller the greater is the increase in the price level
Demand-pull inflation
3©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
Real domestic output, GDP
Pri
ce level
AD1
AS
P1
P2
GDP2GDP1GDPf
AD2
0
4©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
Deflation, a decline in the price level, is a rarity in the Canadian economy
Real output takes the full brunt of the decline in AD because product prices are “sticky” in the short run fear of price wars menu costs wage contracts morale, effort, & productivity minimum wage menu costs fear of price wars
5©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
Real domestic output, GDP
Pri
ce level
AD1
AS
P1
P2
GDP1 GDP2GDPf
AD2
c
ab
0
6©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
Effects of a leftward shift in AS are doubly bad output decreases price level increases
7©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
Real domestic output, GDP
Pri
ce level
AD
AS1
P1
P2
GDP1 GDPf
AS2
a
b
0
8©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
Increases in AD should normally lead to inflation
In the late 1990s, productivity growth has shifted the long-run AS curve to the right
Economy slowed down in 2001 due to a substantial fall in investment spending
During 2002-2006 economy rebounded but followed by the recession of 2008-2009.
9©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3
Real domestic output, GDP
Pri
ce level
AD1
AS2
P1
P2
GDP2GDP1
AS1
b
AD2
c
P3
GDP3
a
0
10©2013 McGraw-Hill Ryerson Ltd. Chapter 10.3