Aggregate Demand and Aggregate Supply
| English | Chinese | Pinyin |
|---|---|---|
| price level | 价格水平 | jià gé shuǐ píng |
| aggregate demand | 总需求 | zǒng xū qiú |
| aggregate supply | 总供给 | zǒng gōng jǐ |
| consumption | 消费 | xiāo fèi |
| investment | 投资 | tóu zī |
| government spending | 政府支出 | zhèng fǔ zhī chū |
| net exports | 净出口 | jìng chū kǒu |
The supply and demand of a whole economy
- Zoom out from one market to the entire economy, and the same logic scales up: total demand and total supply set the overall price level 价格水平 and output.
- Aggregate demand 总需求 (AD) and aggregate supply 总供给 (AS) are the master diagram of macroeconomics.
Aggregate demand
- AD is total planned spending in the economy:
- C consumption 消费, I investment 投资, G government spending 政府支出, (X − M) net exports 净出口. The AD curve slopes down against the price level.
Real GDP swinging around its long-run trend
Aggregate demand & supply
AD and AS cross at the price level and national output.
If C = 600, I = 200, G = 300, X = 150, M = 100, what is AD = C + I + G + (X − M)?
600 + 200 + 300 + (150 − 100) = 1100 + 50 = 1150.
Which is NOT a component of aggregate demand?
AD = C + I + G + (X − M); saving is a withdrawal, not a component of AD.
In AD = C + I + G + (X − M), the term (X − M) is called net ______.
Exports minus imports = net exports.
Aggregate supply and equilibrium
- AS is total planned output; it slopes up (higher prices reward more production).
- Where AD meets AS sets the equilibrium price level and real GDP.
AD and AS cross to set the economy's price level (P) and real output (Y).
Worked example. If C = 600, I = 200, G = 300, X = 150 and M = 100, then AD = 600 + 200 + 300 + (150 − 100) = 1150.
The equilibrium price level and real output are set where AD meets AS.
Their intersection determines the macro equilibrium.
Shifts
- AD shifts with confidence, interest rates, government policy, or the exchange rate.
- A rightward AD shift raises both output and the price level (if AS slopes up).
Demand-pull and cost-push inflation on the AD-AS diagram
A rise in consumer confidence shifts AD right, which (with an upward AS) raises:
A rightward AD shift along an upward AS raises real GDP and the price level.
You've got it
- AD $= C + I + G + (X - M)$, slopes down; AS slopes up
- they cross to set the equilibrium price level and real GDP
- a rightward AD shift raises output and the price level