Aggregate Supply/ Aggregate Demand- Application

Kaplan University

Objectives Explain the short run aggregate supply/ aggregate demand changes.

Discuss the 4 different types of shocks that affect the aggregate demand and aggregate supply.

Aggregate Supply Short Run Changes in Commodity Prices

Changes in Nominal Wages

Changes in Productivity

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Changes in Commodity Prices Prices of commodities increase–

increasing aggregate supply in the short run causes AS to decrease; If commodity prices decrease, AS increase

(inverse relationship here)

Cost to produce the goods (via raw material) increase

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Changes in Nominal Wages Nominal Wages increase- AS

decrease

Nominal Wages decrease- AS increase

Why?

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Changes in Productivity An increase in productivity- AS

increases

An decrease in productivity- AS decreases

Why?

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Aggregate Supply A shift to the right- growth

A shift to the left- shrinking economy

Which is best? Why?

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Short Run Aggregate Demand Changes in Expectation

Changes in Wealth

Changes in Stock of Physical Capital

Changes in Expectations Positive expectations- AD increases!

Negative expectations- AD decreases!

Ie/ expectations that commodity prices will decrease; terrorist attack

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Change in Wealth Increase wealth- AD increase

Decrease wealth- AD decrease

More money is spent in the macroeconomy!

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Change in Stock of Physical Capital Increase in physical capital= AD increase

Decrease in physical capital= AD decrease

** Aggregate capital in the economy….

Shocks Positive demand shock

Positive supply shock

Negative demand shock

Negative supply shock

Each will affect AD or AS differently!

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Positive Demand Shock Good expectations

Increased wealth

Increased stock capital

Examples…(aggregate demand increases)

Positive Supply Shock Technological

advancement

Discovery of a commodity (abundance)

Examples… (aggregate supply increases)

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Negative Demand Shock

Consumers suddenly do not demand good/ service any more

Examples…. (aggregate demand decreases)

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Negative Supply Shock

Sudden decrease in supply in item

Examples….. (aggregate supply decreases)

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To Think About…. How are the current oil prices affecting the AD / AS short run curves?

How do the 4 shocks affect you and the overall macroeconomy?

Which shocks are most beneficial to the economy? Which are not? Why?

The End