IV. The macroeconomy
    B. Aggregate demand (AD) and aggregate supply (AS)

    We have now laid out our key concerns at the macroeconomic level:
    Output
    Unemployment
    Inflation

    What we want to turn to now are
    i. The underlying causes of business cycles, unemployment and inflation
    ii. What policies, if any, we can make use of to remedy these problems.

    To do these things, we want to construct a simple model of how the macroeconomy works.

    --a basic macroeconomic equilibrium

    Micro looks at individual markets such as movies, apples, shirts
    Plots Ps and Qs
    Macro looks at entire national economy

    What analog to S & D can we come up with at the macro level?
    How can we aggregate individual markets to get D & S for the economy's entire output?

    With aggregate demand and aggregate supply curves

Basic geometry The axes     Y: real output (real GDP)     P: price level: GDP deflator     AD: a curve showing how much national output buyers want to purchase in a particular year at various price levels.     = TPS: total planned spending on domestic output

    SRAS (short-run AS): a curve showing how much national output sellers want to produce in a particular year at various prices
    = Total current production (Equilibrium)

    Year:  ________
    NGDP = ________
    Y = RGDP = ________
    P = ________

    We add a reference line to show the economy's potential output:
    LRAS (long-run AS): a vertical line showing the economy's full employment output (Yf): the level of output which could be achieved if the economy's resources were fully employed and efficiently used => economy on its PPF (data for estimated potential GDP)

    Yf = ________
    U = ________

    1. Aggregate demand (AD)

Learning objectives: Define the components of Aggregate Demand (AD). Explain why AD slopes down. Distinguish between movements along versus shifts of AD.

    The main concern of those worried about economic stabilization is what causes AD to shift around
    To get a handle on that, we have to first get a grip on what goes into aggregate demand

    Concerns now:
    Who buys domestic output?
    Who receives domestic income?

    a. The components of AD

    Households: Consumption (C)
        also: Investment in housing

    Firms: planned Investment (I)
        Plant and equipment
        Planned inventory investment

    Government: makes purchases (G)
    Excludess: transfers: social security, welfare
    Includes: defense, highways, education

    Foreigners:
    Exports (X) -- adds to AD
    Imports (M)--reduces AD

    Combined: AD = C + I + G + (X-M)

True or false:

1. Since 1973, consumers have become increasingly squeezed by big government.
2. Since 1973, the US has cut back on investments for the future.
3. Since 1973, the US has become more globalized.

Since 1973, consumption as a share of GDP has increased 9%. Where has the offsetting decrease come from?
    Lower shares for investment and government and a trade deficit

    b. How AD behaves

    (1) Movements along AD

    price level changes --> move along AD
    AD itself does not shift

    AD slopes down, but why?
    In a single market: +P --> -Qd because of substitutes.
    AD includes all products, so what do we substitute?
    => substitutes cannot explain slope of AD

    3 reasons AD slopes down: