Chap007[1] - Chapter 07 Aggregate Demand and Aggregate...

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Chapter 07 - Aggregate Demand and Aggregate Supply Chapter Seven Aggregate Demand and Aggregate Supply CHAPTER OVERVIEW 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 and help students better understand the effects of fiscal and monetary policy. 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, and examines the problem of downward inflexibility of wages and prices. INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Define aggregate demand and aggregate supply. 2. State the determinants of the aggregate demand curve’s location, and explain how the curve will shift when one of these determinants changes. 3. Explain the shape of the immediate-short-run aggregate supply curve. 4. Explain the shape of the short-run aggregate supply curve. 5. Explain the shape of the long-run aggregate supply curve. 6. State the determinants of the aggregate supply curve’s location, and explain how the curve will shift when one of those determinants changes. 7. Find an economy’s equilibrium price level and real domestic output using AD-AS. 8. Demonstrate and explain the effects of shifts in aggregate demand and/or aggregate supply on the equilibrium price level and real domestic output of an economy. 9. Illustrate and differentiate between demand-pull inflation and cost-push inflation. 10. List the five reasons why the price level is inflexible (or “sticky”) downward. 11. Explain the Ratchet Effect. 12. Provide an intuitive explanation of the multiplier effect. 13. Explain how the impact of oil price fluctuations has changed for the U.S. economy over the past couple decades. 14. Define and identify terms and concepts at the end of the chapter and in the appendix. COMMENTS AND TEACHING SUGGESTIONS 1. The aggregate demand-aggregate supply model will be used repeatedly for discussion of unemployment, inflation, and economic growth in other chapters. It is important for students to understand the basics in this chapter. 7-1
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Chapter 07 - Aggregate Demand and Aggregate Supply 2. While it is helpful to show the similarities between the aggregate model and single-product supply and demand markets explained in Chapter 3, you need to highlight the differences between the two models. 3. One of the AD shifters identified in the chapter is consumer expectations. One way to get students thinking about consumer views of the economy today and in the near future is the visit The Conference Board website at www.conference-board.org and reviewing the consumer confidence index (CCI) as well as the
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