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

Principles of Macroeconomics


Aggregate Supply and Aggregate Demand


In this section, we combine the idea of aggregate demand for goods and services (which is what we explore in the Expenditure Multiplier section) with aggregate supply. We discuss how both the aggregate demand and the aggregate supply for all final goods and services depend on the aggregate price level. We develop a graphical model of aggregate demand and aggregate supply that shows how real GDP and aggregate price level are determined in equilibrium. We also discuss what other factors (besides aggregate price level) can influence demand and supply decisions, and demonstrate the effect that it has on the economy in the short-run and the long-run.


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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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Government Response to a Recession

Government spending is a component of aggregate demand, such like consumption, net exports, and investment. Government officials may also be able to change tax rates for consumers, which also affects aggregate demand; or they could change tax rates for businesses, which may affect aggregate supply. In this pencast, we illustrate how governments can use these fiscal policy tools to change the short-run equilibrium in the aggregate supply and aggregate demand framework. [Play Pencast]


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