Aggregate Demand &

Supply

By: Nino Bazhunaishvili

Prof: Tatiana Papiashvili

International Black Sea University

Monetary Policy & Theory

Contents• History • Components• Aggregate demand curves• Keynesian cross• Aggregate demand-supply

model• Criticism• Bibliography

History• John Maynard Keynes in 

The General Theory of Employment, Interest and Money argued during the Great Depression that the loss of output by the private sector as a result of a systemic shock (the Wall Street Crash of 1929) ought to be filled by government spending.

•  First, he argued that with a lower ‘effective aggregate demand’, or the total amount of spending in the economy (lowered in the Crash), the private sector could subsist on a permanently reduced level of activity and involuntary unemployment, unless there was active intervention. Business lost access to capital, so it had dismissed workers.

COMPONENTSThe sum of all expenditure in the economy over a period of time

Macro concept – WHOLE economyFormula:

AD = C+I+G+(X-M)C= Consumption SpendingI = Investment SpendingG = Government Spending(X-M) = difference between spending on imports and receipts from exports (Balance of Payments)

CONSUMPTION EXPENDITURE

Exogenous factors affecting consumption:•Tax rates•Incomes – short term and expected income over lifetime•Wage increases•Credit•Interest rates•Wealth

PropertySharesSavingsBonds

INVESTMENT EXPENDITURE

Spending on:MachineryEquipmentBuildingsInfrastructure

Influenced by:Expected rates of returnInterest ratesExpectations of future salesExpectations of future inflation rates

NET EXPORT

The value of a country's total exports minus the value of its total imports. It is used to calculate a country's aggregate expenditures, or GDP, in an open economy.

GOVERNMENT EXPENDITURE

•Defence•Health•Social Welfare•Education•Foreign Aid•Regions•Industry•Law and Order

AD

The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as "total spending".

AD curve

Shifts in AD

MACROECONOMIC POLICY

Fiscal policy:Government Income (taxes and borrowing)Government SpendingMonetary policy: Interest Rates

AS

AS

The total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate-supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally, there is a positive relationship between aggregate supply and the price level. Rising prices are usually signals for businesses to expand production to meet a higher level of aggregate demand. 

Also known as "total output".

AS curve

Over the long run, only capital, labor, and technology affect the LRAS in the macroeconomic model because at this point everything in the economy is assumed to be used optimally. In most situations, the LRAS is viewed as static because it shifts the slowest of the three. The LRAS is shown as perfectly vertical, reflecting economists' belief that changes in aggregate demand (AD) have an only temporary change on the economy's total output.

During the short-run, firms possess one fixed factor of production (usually capital). This does not however prevent outward shifts in the SRAS curve, which will result in increased output/real GDP at a given price. Therefore, a positive correlation between price level and output is shown by the SRAS curve.

Shift in AS

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 LeftDecreases in Aggregate Supply

Shifts to the RightIncreases in Aggregate Supply

Factors That Shift the Aggregate Supply Curve

Equilibrium The equilibrium price level is the point at which the aggregate demand and aggregate supply curves intersect.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.

• Stagflation occurs when output is falling at the same time that prices

are rising.

• One possible cause of stagflation is an increase in costs.

BIBLIOGRAPHY

https://www.google.ge/search?q=equilibrium+of+aggregate+demand+and+aggregate+supply&rlz=1C1SNNT_enGE485GE485&tbm=isch&tbo=u&source=univ&sa=X&ei=z15uUcrxBoiVtQatvYDgBQ&ved=0CEYQsAQ&biw=1366&bih=600

https://www.google.ge/search?q=why+aggregate+supply+changes&rlz=1C1SNNT_enGE485GE485&aq=f&oq=why+aggregate+supply+changes&sourceid=chrome&ie=UTF-8

http://www.econport.org/content/handbook/ADandS.html