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Aggregate Demand and Aggregate Supply CHAPTER ELEVEN AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER OVERVIEW The aggregate expenditures model developed in Chapters 9 and 10 is a fixed-price-level model. Its focus is on changes in real GDP, not on changes in the price level. This chapter introduces a variable-price model in which it is possible to simultaneously analyze changes in real GDP and the price level. This distinction should be made explicit for those students who have covered Chapters 9 and 10. What students learn in this chapter will help organize their thoughts about equilibrium GDP, the price level, and government macroeconomic policies. The tools learned will be applied in later chapters. The present chapter introduces the concepts of aggregate demand and aggregate supply, explaining the shapes of the aggregate demand and aggregate supply curves and the forces causing them to shift. The equilibrium levels of prices and real GDP are considered. Finally, the chapter analyzes the effects of shifts in the aggregate demand and/or aggregate supply curves on the price level and size of real GDP. WHATS NEW Major revisions are under the heading Changes in Equilibrium. The new subtitles are related to demand-pull inflation, the multiplier in presence of price level changes, decreases in aggregate demand and employment, cost-push inflation, and increases in aggregate supply with full-employment and price stability. The derivation of the AD curve from AE has been reworked. Discussion of the ratchet effect has been deleted. The term wealth effect is changed to real balances effect through out. Other changes improve clarity. The Last Word has been updated. Finally, a new Internet Question was added. INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Define aggregate demand and aggregate supply. 2. Give three reasons why the aggregate demand curve slopes downward. 3. Illustrate, label, and explain the three ranges of the aggregate supply curve. 4. State the determinants of the aggregate demand curves location. 5. Explain the shape of the aggregate supply curve. 6. Indicate the determinants of the supply curves location. 7. Explain how a market economy moves to equilibrium price and output level. 8. Predict effects of an increase in aggregate demand when economy is in (a) horizontal range, (b) intermediate range, and (c) vertical range. 9. Explain how the multiplier is weakened in the intermediate or vertical range of aggregate supply. 10. State three basic causes of changes in aggregate supply differentiating between leftward and rightward shifts of the curve. 11. Define and identify terms and concepts at the end of the chapter.... View Full Document

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