ECON 201 Lecture Notes - Lecture 18: Aggregate Demand, Aggregate Supply, Fiscal Policy

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8 Feb 2017
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Econ 201 Lecture 18 AD & AS Pt. 1
Aggregate Demand
Keep in mind that micro supply and demand is very different than aggregate supply and
demand!
Aggregate demand curve shows relationship between aggregate price level and the quantity of
aggregate output demanded by households, businesses, the government and the rest of the
world
Downward sloping. Why?
o NOT because of the Law of Demand
o It’s NOT eause of fallig pries ad uyig ore i respose to that (sie ALL pries
fell)
o Downward sloping because of 2 things: WEALTH EFFECT and INTEREST RATE EFFECT
Wealth effect of a change in the aggregate price level
o A higher aggregate prie leel redues the purhasig poer of households’ ealth ad
reduces consumer spending
Interest rate effect of a change in the aggregate price level
o If price rises, you need to hold more money to carry out transactions (in cash), your
income is lower you will save less
A change in the price level
o Causes a shift of the AE curve
o Which is a movement along the AD curve
If something else besides P shifts the AE curve, then the AD curve shifts
AD is drawn holding constant all the stuff that is held constant when drawing AE, except the
price level
Shifts of AD
Shifts:
o Changes in expectations
o Wealth (for reasons other than changes in P)
o The stock of physical capital
o Government policies
Fiscal policy
Monetary policy
Aggregate Supply
the aggregate supply curve shows the relationship between aggregate price level and the
quantity of aggregate output in the economy
it’s kid of like the total possible production
o kind of like a production function
there is also long run aggregate supply.
o Total possile produtio does’t deped o pries
o Depends only on physical capital, human capital, and technology
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