Chapter 7: Aggregate Demand and Aggregate Demand and ...
Chapter 7: Aggregate Demand and Aggregate Demand and ...
Chapter 7: Aggregate Demand and Aggregate Demand and ...
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Equilibrium<br />
Equilibrium<br />
Real Output<br />
t Real Output<br />
t<br />
<strong>Dem<strong>and</strong></strong>ed<br />
Price Level<br />
Supplied<br />
(Billions)<br />
(Index Number) (Billions)<br />
AS<br />
$506 108<br />
$513<br />
508 104 512<br />
510 100 510<br />
Price Level<br />
100<br />
Equilibrium<br />
LO: 7-3<br />
512 96 507<br />
514 92 502<br />
Equilibrium Price Level <strong>and</strong><br />
Equilibrium Real GDP<br />
LO: 7-3<br />
AD<br />
510<br />
Real Domestic Output, GDP (Billions of Dollars)<br />
7-13<br />
7-14<br />
Using the AD-AS Model to Explain<br />
Inflation <strong>and</strong> Recession<br />
• When aggregate supply <strong>and</strong> aggregate dem<strong>and</strong><br />
change, inflation <strong>and</strong> recession can occur in the<br />
short run.<br />
• <strong>Dem<strong>and</strong></strong>-pull inflation occurs when aggregate<br />
dem<strong>and</strong> increases (AD curve shifts to the right).<br />
• Cost-push inflation occurs when the costs of<br />
production rise (AS curve shifts to the left).<br />
• Recession occurs when aggregate dem<strong>and</strong> falls<br />
(AD curve shifts to the left) <strong>and</strong> prices are sticky<br />
downwards.<br />
LO: 7-4<br />
7-15<br />
<strong>Dem<strong>and</strong></strong>-Pull Inflation<br />
LO: 7-4<br />
Price<br />
Level<br />
P 2<br />
P 1<br />
Increase in <strong>Aggregate</strong> g <strong>Dem<strong>and</strong></strong><br />
<strong>Dem<strong>and</strong></strong>-Pull<br />
Inflation<br />
Q f Q 1<br />
Real Domestic Output, GDP<br />
AS<br />
AD<br />
AD 1<br />
7-16
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