1. Aggregate
supply and
Aggregate
Demand
Foundation of
Microeconomics
Alaleh Mani
2011

2. Total review
 Aggregate Supply :
Long- run and movement along Long -run
supply and change in Potential GDP and
fluctuation in aggregate supply
Short- run and Movement along short- run
supply and change in money wage rate and
fluctuation in aggregate supply demand
 Aggregate Demand:
Movement along demand
Change the aggregate demand
 Macroeconomic long -run and short -run
equilibrium

3. Long-run Aggregate Supply and
movement along LAS and Change in
LAS
 Long -run is the time real wage rate adjust
to full employment
∆ money wage rate=∆ goods and service price  real wage rate= fix
labor quantity= fix  GDP = fix Price level change  movement along LAS
Potential GDP= GDP at full employment
Price Level
independent to price
1.Quantity of labor at full
employment
2.Human and physical
capital
3.Technology advances

4. Short-run Aggregate Supply and
movement along SAS and SAS shift
 Long -run is the time real wage rate and
other variable remain fix
∆ goods and service price and money wage rate= fix  Price level change
 movement along SAS
SAS change by money wage rate:
1.departure from full em
Price Level
2.Expectation of inflatio
SAS change by potential GDP c
Real GDP>Potential Real GDP>Potential GDP
GDP

5. Aggregate Demand
 Totaleconomic production is bought by :
1.real consumption expenditure (C)
2. Investment (I)
3. Government Expenditure ( G)
4.net export (X-M)
Y= C+I+G+X-M

6. Aggregate Demand Curve
Change along the AD
 1.Wealth effect:
Price level Wealth (bond, stock, saving) restore wealth (for
health, education, retirement) saving C Demand for GDP
 2.Substitution effect:
Price level Real value of money
interest rate Delay in C and I and X-M GDP demand
Intertemporal substitution effect: substitution across time

7. Shift of the Aggregate
Demand
 Expectation:  Consumption C
 E(Income)
 E(inflation)
 E(Profit) Investment I
 Fiscal Policy:
 Tax
 Transfer Payment: unemployment benefit, welfare Consumption
 Expenditure on goods and services
 Disposable Income =Income-Tax +Transfer Payment
 Monetary policy: fed change the quantity of money Save
 The world economy:
 Exchange rate :if ER falls  local product is sold more Consumpti
 Foreign Income: on
Save

8. Equilibrium
Money wage adjust
Real GDP

9. Economic Growth and Inflation
LAS >>AD: Growth :
AD>> LAS : Inflation:
1.Technology
1.Money Quantity rise
2.Labor
2.AD speed up to LAS
3.Capital

10. Business Cycle
LAS
Output gap=Recessionary
LAS
Gap Output gap=Inflationary Gap
LAS
SAS SAS
SAS
AD AD
AD
Money Wage rate =sticky=fix
Full employment
Potential GDP Inflationary Gap
Recessionary Gap

11. Recession and inflation together:
Stagflation Oil price rise production fall

12. School of thought Founders Economic AS AD Policy
Perceptio Fluctuation Fluctuation
n
Classic and New Adam zmith, Self Technology Technology Tax is
School of thought
Classic Ricardo,Miller regulated
at full
employm
Money
wage rate
is flexible
increase the
demand for new
plant and
inefficient
ent and rapidly equipment but
adjust increase the useful
life of old one
Keynesian and Keynes Fiscal and Money Expectation Fiscal and
new keynsian monetary wage rate monetary
are is sticky so policy
needed need help needed
New
keynesian
say good’s
price are
sticky as
well
Monetarist Fridman, Burnner Self Money Quantity of money Inappropri
regulated wage rate ate
at full is sticky monetary
employm policy
ent should stop
Tax is
inefficient