Category: The Aggregate Demand/Aggregate Supply Model

11.1 Macroeconomic Perspectives on Demand and Supply Neoclassical economists emphasize Say’s law, which holds that supply creates its own demand. Keynesian economists emphasize Keynes’ law, which holds that demand creates its own supply. Many mainstream economists take a Keynesian perspective, emphasizing the importance of aggregate demand, for the short run, and a neoclassical perspective, emphasizing the…

Learning Objectives By the end of this section, you will be able to: We can use the AD/AS model to illustrate both Say’s law that supply creates its own demand and Keynes’ law that demand creates its own supply. Consider the SRAS curve’s three zones which Figure 11.11 identifies: the Keynesian zone, the neoclassical zone, and the intermediate zone. Figure 11.11 Keynes, Neoclassical,…

Learning Objectives By the end of this section, you will be able to: The AD/AS model can convey a number of interlocking relationships between the three macroeconomic goals of growth, unemployment, and low inflation. Moreover, the AD/AS framework is flexible enough to accommodate both the Keynes’ law approach that focuses on aggregate demand and the short run,…

Learning Objectives By the end of this section, you will be able to: As we mentioned previously, the components of aggregate demand are consumption spending (C), investment spending (I), government spending (G), and spending on exports (X) minus imports (M). (Read the following Clear It Up feature for explanation of why imports are subtracted from…

Learning Objectives By the end of this section, you will be able to: The original equilibrium in the AD/AS diagram will shift to a new equilibrium if the AS or AD curve shifts. When the aggregate supply curve shifts to the right, then at every price level, producers supply a greater quantity of real GDP.…

Learning Objectives By the end of this section, you will be able to: To build a useful macroeconomic model, we need a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level. We call this the aggregate demand/aggregate supply model. This…

Learning Objectives By the end of this section, you will be able to: Macroeconomists over the last two centuries have often divided into two groups: those who argue that supply is the most important determinant of the size of the macroeconomy while demand just tags along, and those who argue that demand is the most…

Figure 11.1 New Home Construction At the peak of the housing bubble, many people across the country were able to secure the loans necessary to build new houses. (Credit: modification of “our house! Again!” by Tim Pierce/Flickr Creative Commons, CC BY 2.0) Chapter Objectives In this chapter, you will learn about: Bring It Home From Housing Bubble to…