MGEA06H3 Lecture Notes - Lecture 6: Price Level, Aggregate Demand, Aggregate Supply

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10 Feb 2016
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Chapter 12 – Aggregate Demand and Aggregate Supply (Part 1)
Outline
Derive the aggregate demand curve from the income-expenditure
model.
Derive the short-run & long-run aggregate supply curves.
Discuss the short-run equilibrium vs. the long-run equilibrium.
Introduce the concept of output gap.
Discuss the (natural) adjustment mechanism.
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Aggregate Demand (AD)
An economy’s aggregate demand shows the relationship between the
aggregate price level and the quantity of aggregate output
demanded by all sectors in the economy (households, firms, the
government, and the foreign sector).
Holding all else constant, there is an inverse relationship between the
aggregate price level (P) and the quantity of aggregate output
demanded.
Why Is the Aggregate Demand Curve Downward Sloping?
The national income identity (Chapter 7):
GDP = Y = C + I + G + X – IM
With the exception of G, most of the components of GDP are largely
from the private sectors.
ÞTo derive the AD curve, we need to understand how does a change
in P affect C, I, X, and IM.
An obvious but WRONG answer: If P , demand for goods and
services .
In macroeconomics, we look at the demand for ALL goods and
services.
ÞIf all prices, including prices of labour & capital, increase, then
dollar incomes also increase.
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