key concepts chapters 9 – 12! homework chapters 11-12 u chapter 11 - bonus - friday january 27. u...

Key concepts chapters 9 – 12!

Homework Chapters 11-12 Chapter 11 - Bonus - Friday

January 27.

Chapter 12 - Bonus – Wednesday, February 1.

Tentative Test Day Friday, February 3rd.

Hold on here we go!!!

Key concepts chapters 9 – 12!

Homework Chapters 9-10-11-12 Test Day - Next Friday Approximate number of questions per chapter.

Chapter 9 – 10 Questions Keynesian Cross, MPC, Savings +

Consumption = DI

Chapter 10 – 10 Questions Simplified, Tax, and Balanced Budget

Multipliers

Chapter 11 – 25 Questions AD, AS, LRAS

Chapter 12 – 15 Questions Fiscal Policy: Expansion,

Contraction, Automatic, & Discretionary

Key concepts chapters 9 – 12!

Aggregate DemandAnd

Aggregate Supply

Aggregate DemandAnd

Aggregate Supply

CHAPTER ELEVEN

Key concepts chapters 9 – 12!

Aggregate Demand:Aggregate Demand:...the various amounts of goods andservices - the amounts of real output - that domestic consumers, businessesand foreign buyers collectively desireto purchase at each possible price level

Key concepts chapters 9 – 12!

Aggregate Demand:Aggregate Demand:...is downsloping because of:

Key concepts chapters 9 – 12!

Aggregate Demand:Aggregate Demand:

...is downsloping because of:

1 - Wealth Effect (Real Balances)A higher price level reduces the purchasing power of thegeneral public’s financial assets.

Remember the arbitrary and capricious nature of inflation???That one was for you Sean!

Key concepts chapters 9 – 12!

Aggregate Demand:Aggregate Demand:

...is downsloping because of:

1 - Wealth Effect (Real Balances)

2 - Interest-Rate EffectWhen the supply of money is fixed, as price levels rise interestrates increase because as the demand for $ increases the pricepaid for its use also increases.

Key concepts chapters 9 – 12!

Aggregate Demand:Aggregate Demand:...is downsloping because of:

1 - Wealth Effect (Real Balances)2 - Interest-Rate Effect3 - Foreign Purchases Effect

As prices go up in the U.S, our goods become more expensive,Thus reducing the amount of exports and increasing imports.

Agg

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GDP1

GDP1

P1

1

1’

(C a + I g + X n + G) 1 at P 1

Real GDP atReal GDP atprice level 1price level 1

Deriving the Aggregate Demand Curve

Agg

rega

te e

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(bill

ions

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0

0

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GDP1

GDP1

P1

1

1’

(C a + I g + X n + G) 1 at P 1

Real GDP atReal GDP atprice level 1price level 1

What ifprices go

up?

What ifprices go

up?

Deriving the Aggregate Demand Curve

Agg

rega

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(bill

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0

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GDP1

GDP1

P1

(C a + I g + X n + G) 1 at P 1

1

1’

P2

GDP2

GDP2

(C a + I g + X n + G) 2 at P 2

2

2’

A Lower RealA Lower RealGDP ExistsGDP Exists

at price level 2at price level 2

Deriving the Aggregate Demand Curve

Agg

rega

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(bill

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0

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GDP1

GDP1

P1

(C a + I g + X n + G) 1 at P 1

1

1’

P2

GDP2

GDP2

(C a + I g + X n + G) 2 at P 2

2

2’

A Lower RealA Lower RealGDP ExistsGDP Exists

at price level 2at price level 2

What ifprices goup again?

What ifprices goup again?

Deriving the Aggregate Demand Curve

Agg

rega

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(bill

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0

0

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GDP1

GDP1

P1

(C a + I g + X n + G) 1 at P 1

1

1’

P2

GDP2

GDP2

(C a + I g + X n + G) 2 at P 2

2

2’

(C a + I g + X n + G) 3 at P 3

3

P3

3’

A Still LowerA Still LowerReal GDP LevelReal GDP LevelExists at priceExists at price

level 3level 3

Deriving the Aggregate Demand Curve

Agg

rega

te e

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(bill

ions

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0

0

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GDP1

GDP1

P1

(C a + I g + X n + G) 1 at P 1

1

1’

P2

GDP2

GDP2

(C a + I g + X n + G) 2 at P 2

2

2’

(C a + I g + X n + G) 3 at P 3

3

P3

3’

The Aggregate DemandThe Aggregate DemandCan Be ConstructedCan Be Constructed

Deriving the Aggregate Demand Curve

Deriving the Aggregate Demand Curve

Agg

rega

te e

xpen

ditu

res

(bill

ions

of

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0

0

Pric

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GDP1

GDP1

P1

(C a + I g + X n + G) 1 at P 1

1

1’

P2

GDP2

GDP2

(C a + I g + X n + G) 2 at P 2

2

2’

(C a + I g + X n + G) 3 at P 3

3

P3

3’

The Aggregate DemandThe Aggregate DemandCan Be ConstructedCan Be Constructed

0

Pri

ce le

vel

Real domestic output, GDP

CHANGES IN AGGREGATE DEMANDCHANGES IN AGGREGATE DEMAND

AD1

AD Can increase...AD Can increase...

0

Pri

ce le

vel

Real domestic output, GDP

CHANGES IN AGGREGATE DEMANDCHANGES IN AGGREGATE DEMAND

AD1

AD2

0

Pri

ce le

vel

Real domestic output, GDP

CHANGES IN AGGREGATE DEMANDCHANGES IN AGGREGATE DEMAND

AD1

AD Can decrease...AD Can decrease...

AD2

0

Pri

ce le

vel

Real domestic output, GDP

CHANGES IN AGGREGATE DEMANDCHANGES IN AGGREGATE DEMAND

AD1AD3

AD2

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealthConsumer wealth

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectationsConsumer expectations

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtednessConsumer indebtedness

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• TaxesTaxes

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes

Change in Investment SpendingChange in Investment Spending

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes

Change in Investment SpendingChange in Investment Spending• Interest ratesInterest rates

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes

Change in Investment SpendingChange in Investment Spending• Interest rates• Profit expectations on investment projectsProfit expectations on investment projects

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes

Change in Investment SpendingChange in Investment Spending• Interest rates• Profit expectations on investment projects• TechnologyTechnology

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Consumer SpendingChange in Consumer Spending• Consumer wealth• Consumer expectations• Consumer indebtedness• Taxes

Change in Investment SpendingChange in Investment Spending• Interest rates• Profit expectations on investment projects• Technology• Degree of excess capacity – Inventory!Degree of excess capacity – Inventory!01020304050607080901st Qtr2nd Qtr3rd Qtr4th Qtr

EastWestNorth

Key concepts chapters 9 – 12!

Change in Government SpendingChange in Government Spending

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Key concepts chapters 9 – 12!

Change in Government SpendingChange in Government Spending

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Net Export SpendingChange in Net Export Spending

Key concepts chapters 9 – 12!

Change in Government SpendingChange in Government Spending

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Net Export SpendingChange in Net Export Spending

• National income abroadNational income abroad

Key concepts chapters 9 – 12!

Change in Government SpendingChange in Government Spending

DETERMINANTS OF AGGREGATE DEMANDDETERMINANTS OF AGGREGATE DEMAND

Change in Net Export SpendingChange in Net Export Spending

• National income abroad• Exchange ratesExchange rates

illustrated...illustrated...

Changes in the Aggregate Demand Curve

Agg

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GDP1

GDP1

P1

(C a + I g + X n + G) 1 at P 1

An Increase inAn Increase inAggregate DemandAggregate Demand

An IncreaseAn Increasein Aggregatein AggregateExpendituresExpenditures

AD1

Agg

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0

0

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GDP1

GDP1

P1

(C a + I g + X n + G) 2 at P 1

GDP2

GDP2

(C a + I g + X n + G) 1 at P 1

An Increase inAn Increase inAggregate DemandAggregate Demand

An IncreaseAn Increasein Aggregatein AggregateExpendituresExpenditures

AD1

AD2

Changes in the Aggregate Demand Curve

Key concepts chapters 9 – 12!

Aggregate Supply:...the level of real domestic output which will be produced at eachprice level

Key concepts chapters 9 – 12!

Aggregate Supply:...has three ranges:

Key concepts chapters 9 – 12!

Aggregate Supply:...has three ranges:

1 - Horizontal Range1 - Horizontal Range

Key concepts chapters 9 – 12!

Aggregate Supply:...has three ranges:

1 - Horizontal Range

2 - Vertical Range2 - Vertical Range

Key concepts chapters 9 – 12!

Aggregate Supply:...has three ranges:

1 - Horizontal Range

2 - Vertical Range

3 - Intermediate (Upsloping) Range3 - Intermediate (Upsloping) Range

Pric

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Real domestic output, GDP

QQ

PP

HorizontalHorizontalRangeRange

Upsloping orUpsloping orIntermediateIntermediate

RangeRange

VerticalVerticalRangeRange

As developed in chapter 8...As developed in chapter 8...

Pric

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Real domestic output, GDP

QQ

PPAn Increase in Aggregate SupplyAn Increase in Aggregate Supply

AS1

Pric

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Real domestic output, GDP

QQ

PP AS1AS2

An Increase in Aggregate SupplyAn Increase in Aggregate Supply

Pric

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Real domestic output, GDP

QQ

PP AS1AS2

A Decrease in Aggregate SupplyA Decrease in Aggregate Supply

Pric

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Real domestic output, GDP

QQ

PP AS1AS2AS3

A Decrease in Aggregate SupplyA Decrease in Aggregate Supply

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLYWhen per unit production costs change firms will alter the amount they produce at each level. What would cause the per unit production costs to change?

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Change in Input PricesChange in Input Prices

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability

• LandLand

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability

• LandLand• LaborLabor

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability

• LandLand• LaborLabor• Capital – (Expectations)Capital – (Expectations)

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability

• LandLand• LaborLabor• CapitalCapital• Entrepreneurial abilityEntrepreneurial ability

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability

• LandLand• LaborLabor• CapitalCapital• Entrepreneurial abilityEntrepreneurial ability

Change in Productivity Change in Productivity

Key concepts chapters 9 – 12!

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Change in Input PricesChange in Input Prices• Domestic resource availabilityDomestic resource availability

• LandLand• LaborLabor• CapitalCapital• Entrepreneurial abilityEntrepreneurial ability

Change in Productivity Change in Productivity

Productivity =real output

input

Key concepts chapters 9 – 12!

Change in legal-Change in legal-institutional institutional environmentenvironment

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Key concepts chapters 9 – 12!

Change in legal-Change in legal-institutional institutional environmentenvironment• Business taxes and subsidiesBusiness taxes and subsidies

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Key concepts chapters 9 – 12!

Change in legal-Change in legal-institutional institutional environmentenvironment• Business taxes and subsidiesBusiness taxes and subsidies

• Government regulationGovernment regulation

DETERMINANTS OF AGGREGATE SUPPLYDETERMINANTS OF AGGREGATE SUPPLY

Pric

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Real domestic output, GDP

QQ

PP

The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level

and the Equilibrium Real GDPAS

AD

Equilibrium in theEquilibrium in theintermediate rangeintermediate range

QeQ1 Q2

Pric

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Real domestic output, GDP

QQ

PP

The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level

and the Equilibrium Real GDPAS

AD

Equilibrium in theEquilibrium in thehorizontal rangehorizontal range

QeQ1 Q2

Pric

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Real domestic output, GDP

QQ

PP

The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level

and the Equilibrium Real GDPAS

Equilibrium in theEquilibrium in thehorizontal rangehorizontal range

Q1

AD1

Pric

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vel

Real domestic output, GDP

QQ

PP

The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level

and the Equilibrium Real GDPAS

Equilibrium in theEquilibrium in thehorizontal rangehorizontal range

Q1

AD1

AD2

Q2

Pric

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vel

Real domestic output, GDP

QQ

PP

The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level

and the Equilibrium Real GDPAS

Equilibrium in theEquilibrium in theintermediate rangeintermediate range

Q1

AD1

P1

Pric

e le

vel

Real domestic output, GDP

QQ

PP

The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level

and the Equilibrium Real GDPAS

AD2

Equilibrium in theEquilibrium in theintermediate rangeintermediate range

Q1 Q2

AD1

P1

P3

Pric

e le

vel

Real domestic output, GDP

QQ

PP

The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level

and the Equilibrium Real GDPAS

P1

Equilibrium in theEquilibrium in thevertical rangevertical range

Qc

AD1

P5

Pric

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Real domestic output, GDP

QQ

PP

The Equilibrium Price Leveland the Equilibrium Real GDPThe Equilibrium Price Level

and the Equilibrium Real GDPAS

P1

AD2

Equilibrium in theEquilibrium in thevertical rangevertical range

Qc

AD1

P5

P6

Pric

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vel

Real domestic output, GDPQQ

PP

The Multiplier withPrice Level ChangesThe Multiplier withPrice Level Changes

AS

AD2

GDP1 GDP2

AD1

P1

P3

GDP3

}}

FullMultiplier

FullMultiplier

ReducedMultiplierReducedMultiplier

Pri

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vel

Real domestic output, GDP

QQ

PP

The Ratchet EffectThe Ratchet EffectAS

AD2

Q1Q2

P1

P3

Q3

AD1 / 3

Why the ratchet?

next...a

bc

Illustratesthe down-wardinflexibilityof prices.

Key concepts chapters 9 – 12!

Causes

Causes

The Ratchet EffectThe Ratchet Effect

Key concepts chapters 9 – 12!

Causes

Causes

• Wage Contracts• Wage ContractsThe Ratchet EffectThe Ratchet Effect

Key concepts chapters 9 – 12!

Causes

Causes

• Wage Contracts• Morale & Productivity• Wage Contracts• Morale & Productivity

The Ratchet EffectThe Ratchet Effect

Key concepts chapters 9 – 12!

Causes

Causes

• Wage Contracts• Morale & Productivity

• Efficiency Wages

• Wage Contracts• Morale & Productivity

• Efficiency Wages

The Ratchet EffectThe Ratchet Effect

Key concepts chapters 9 – 12!

Causes

Causes

• Wage Contracts• Morale & Productivity

• Efficiency Wages• Training Investments

• Wage Contracts• Morale & Productivity

• Efficiency Wages• Training Investments

The Ratchet EffectThe Ratchet Effect

Key concepts chapters 9 – 12!

Causes

Causes

• Wage Contracts• Morale & Productivity

• Efficiency Wages• Training Investments• Minimum Wage

• Wage Contracts• Morale & Productivity

• Efficiency Wages• Training Investments• Minimum Wage

The Ratchet EffectThe Ratchet Effect

Key concepts chapters 9 – 12!

Causes

Causes

• Wage Contracts• Morale & Productivity

• Efficiency Wages• Training Investments• Minimum Wage• Menu CostsMenu Costs

• Wage Contracts• Morale & Productivity

• Efficiency Wages• Training Investments• Minimum Wage• Menu CostsMenu Costs

The Ratchet EffectThe Ratchet Effect

Key concepts chapters 9 – 12!

Causes

Causes

• Wage Contracts• Morale & Productivity

• Efficiency Wages• Training Investments• Minimum Wage• Menu Costs• Fear of Price WarsFear of Price Wars

• Wage Contracts• Morale & Productivity

• Efficiency Wages• Training Investments• Minimum Wage• Menu Costs• Fear of Price WarsFear of Price Wars

The Ratchet EffectThe Ratchet Effect

Pric

e le

vel

Real domestic output, GDP

QQ

PPShifting Aggregate SupplyShifting Aggregate Supply

AS1 AS3AS2

AD1

a

b

c

Q1Q2

P1

P2

Q3

P3

Cost-pushCost-pushinflationinflation

EconomicEconomicGrowthGrowth

Pric

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vel

Real domestic output, GDP

QQ

PPShifting Aggregate SupplyShifting Aggregate Supply

AS1 AS3AS2

AD1

a

b

c

Q1Q2

P1

P2

Q3

P3

Cost-pushCost-pushinflationinflation

ANYQUESTIONS?

ANYQUESTIONS?

aggregate demandaggregate demand wealth effectwealth effect interest-rate effectinterest-rate effect foreign purchases foreign purchases

effecteffect determinants of determinants of

aggregate demandaggregate demand aggregate supplyaggregate supply horizontal rangehorizontal range vertical rangevertical range

aggregate demandaggregate demand wealth effectwealth effect interest-rate effectinterest-rate effect foreign purchases foreign purchases

effecteffect determinants of determinants of

aggregate demandaggregate demand aggregate supplyaggregate supply horizontal rangehorizontal range vertical rangevertical range

intermediate rangeintermediate range determinants of determinants of

aggregate supplyaggregate supply productivityproductivity equilibrium price levelequilibrium price level equilibrium real domestic equilibrium real domestic

outputoutput ratchet effectratchet effect efficiency wagesefficiency wages menu costsmenu costs

intermediate rangeintermediate range determinants of determinants of

aggregate supplyaggregate supply productivityproductivity equilibrium price levelequilibrium price level equilibrium real domestic equilibrium real domestic

outputoutput ratchet effectratchet effect efficiency wagesefficiency wages menu costsmenu costs

Key concepts chapters 9 – 12!

Coming next....Coming next....FISCALPOLICY

Chapter 12Chapter 12