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chap11lecture notes

# chap11lecture notes - CHAPTER ELEVEN AGGREGATE DEMAND AND...

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CHAPTER ELEVEN AGGREGATE DEMAND AND AGGREGATE SUPPLY 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 curve’s location. 5. Explain the shape of the aggregate supply curve. 6. Indicate the determinants of the supply curve’s 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. Explain the ratchet effect of a decrease in aggregate demand. 11. State three basic causes of changes in aggregate supply differentiating between leftward and rightward shifts of the curve. 12. Define and identify terms and concepts at the end of the chapter. LECTURE NOTES I. The Need for an Aggregate Model A. Single product supply and demand model does not explain some things. 1. Why prices rise or fall in general, 2. What determines level of aggregate output, and 3. What determines changes in level of aggregate output. B. Determination of aggregate model: 1. It combines prices of all individual goods and services into a single aggregate price level. 2. It combines equilibrium quantities of all individual goods and services into a single entity called real domestic output. 3. These combinations are referred to as aggregates. 147

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Aggregate Demand and Aggregate Supply II. Aggregate supply is a schedule showing level of real domestic output available at each possible price level. A. Aggregate supply curve may be viewed as having three distinct segments. Price See Figure 11-5 Page 228 Vertical Intermediate Horizontal Q f Output Q 1. Horizontal range : where the price level remains constant with substantial output variation. Substantial unemployment and excess capacity exist in this range, below full- employment output level. Full Multiplier effect . 2. Vertical range : where absolute full capacity is assumed, and any attempt to increase output will bid up resource and product prices . No Multiplier effect 3.
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chap11lecture notes - CHAPTER ELEVEN AGGREGATE DEMAND AND...

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