• <b>United States Federal Reserve</b>

Money and Banking


8. Aggregate Supply and Aggregate Demand


In this section, we discuss the determinants for aggregate demand and aggregate supply for all final goods and services. We develop a graphical model of that shows how real GDP and aggregate price level are determined in equilibrium. We also discuss what other factors can influence demand and supply decisions and demonstrate the effect that it has on the economy in the short-run and the long-run. We combine the model of supply and demand for money with the aggregate supply / aggregate demand model to show how changes in the market for money influence real GDP and price level. The last pencasts in this series demonstrate how macroeconomic problems may be remedied with monetary policy actions.


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Intro to Aggregate Supply / Aggregate Demand

In this pencast, we develop a graphical model for how short-run aggregate supply decisions and aggregate demand decisions depend on the aggregate price level. We also introduce a concept called potential GDP, or long-run aggregate supply. Potential GDP is the maximum sustainable quantity of goods and services that an economy is capable of producing. While in the short-run, aggregate supply decisions depend on the aggregate price level, in the long-run, an economy's capability for producing does not. We use all these concepts to show how short-run equilibrium real GDP can be below and above potential GDP. [Play Pencast]


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Increase in Consumer Confidence

In this example, we use the aggregate supply / aggregate demand model to illustrate the short-run and long-run equilibrium effects on aggregate price level and real GDP that result from a change in consumer confidence. [Play Pencast]


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Currency Depreciation

In this example, we use the aggregate supply / aggregate demand model to illustrate the short-run and long-run equilibrium effects on aggregate price level and real GDP that result from a currency depreciation. [Play Pencast]


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Monetary Policy: Recessionary Gap

Here we start with an economy in a recession (more specifically, a recessionary gap is demonstrated with an aggregate supply / aggregate demand model). We show how the right monetary policy action can alleviate the recession.[Play Pencast]


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Monetary Policy: Inflationary Gap

Here we start with an economy experiencing a high price level and production bubble. We use the aggregate supply and aggregate demand model to illustrate an economy starting with a high price level and with real GDP above potential GDP, which is by definition, unsustainable. This situation is sometimes called an inflationary gap. We show how the right monetary policy action can push down the price level and bring real GDP closer to potential GDP.[Play Pencast]


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