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Understanding AD and AS in Macroeconomics

This document summarizes key concepts in macroeconomics including aggregate supply, aggregate demand, and the effects of expansionary and contractionary policies. It discusses: 1) The aggregate supply curve and how it can shift in the long-run and short-run based on inputs, technology, and price stickiness. 2) How aggregate demand is determined by real money supply, consumer confidence, and tax policies, and how it can shift based on these factors. 3) How in the Keynesian model, a rise in aggregate demand leads to a rise in output but not necessarily prices, while in the Classical model it leads to a rise in both output and prices.

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Mitch Bonita Abarca
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6 views6 pages

Understanding AD and AS in Macroeconomics

This document summarizes key concepts in macroeconomics including aggregate supply, aggregate demand, and the effects of expansionary and contractionary policies. It discusses: 1) The aggregate supply curve and how it can shift in the long-run and short-run based on inputs, technology, and price stickiness. 2) How aggregate demand is determined by real money supply, consumer confidence, and tax policies, and how it can shift based on these factors. 3) How in the Keynesian model, a rise in aggregate demand leads to a rise in output but not necessarily prices, while in the Classical model it leads to a rise in both output and prices.

Uploaded by

Mitch Bonita Abarca
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

CHAPTER 5- AD AND AS

AS -- # of Y firms are willing to apply AD -- combination of price level and Y evel at which the goods market and money market are simultaneously equilibrium AD shifts if: Increase in money supply other expansionary policies: tax; spending; i , Thus, theres an increase money to spend, consumption increases AS shifts to the rights Any expansionary policy can be inflationary. Think of a vertical AS. If the AD shifts to the right, there is a new (and higher price).

1. AS
C1. Long-run Classical AS curve

Figure 2
Accumulating more inputs and technology; AS

full employment: If: D; Production


Page 1

Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

Then: focus on D sector, not on D sector If economy-wide: But if: all factors are used up, you cannot production. So, just price 100 w; D; no more w so just wages; Price of output At FE Potential GDP (target)

C2 Short-run Keynesian AS curve

supply any Y at existing P Due to u; they exploit u at current wage; So AS production do not change Price sticky => firms dont want P; when demand . But it only decrease or increase output. Notes: At CAS (LR) => GDP Potential depend on price level KAS (SR) => Price level dont depend on GDP level Definitions: - Frictional unemployment => usual searching for jobs. (labor mobility) - NRU => arising from natural labor market frictions

Page 2

Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

2. AD
Expansionary policies: shift AD (right) ( G; t; m)v.v.

AD depends on real money supply (M/P) Expansion Money market: If M/P ; Spending ; I; I ; AD v.v. If P; M/P ; AD ; v.v. Expansion goods market If consumer confidence ; => AD v.v. Tax cuts

By: Quantity Theory of Money explains this: GDP nominal = Pxy Velocity = V => (M) (V) = (P) (Y) Money supply = M If V is constant; then (M) (V) = P Y changes For M= PY; V= constant

Page 3

Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

3. Aggregate Demand Policies in Extreme Cases

a.) Keynesian Case C1. If AD , expected price is constant, then: Y* Y** v.v. (ex. G; tax cuts; m.) C2. If AS ; P, Y* Y C3. If AS ; P ; Y C4. If AD , Price is constant; Y

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Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

b.) Classical Case

C1. C2. C3. C4.

If AD ; P , Y is constant If AD ; P , Y is constant If AS ; P ; Y If AS ; P , Y

Page 5

Basic Macroeconomics

Econ 70 XA, Xavier University- Ateneo de Cagayan

c.) If LR; AD ; AS : P; Y

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