• Unit 3: Aggregate Demand and Aggregate Supply

    In this unit we explore the forces affecting growth, inflation, and unemployment at the aggregate level, such as output, income, or the set of components within GDP.

    Aggregate demand is the total amount of goods and services people want to purchase. It measures what people want to buy, rather than what is actually produced. The aggregate demand is the sum of consumption, investment, government expenses, and net exports. Aggregate supply is the total output an economy produces at a given price level. We consider aggregate supply in the short-run and in the long-run.

    Completing this unit should take you approximately 9 hours.

    • Upon successful completion of this unit, you will be able to:

      • graphically represent and interpret an aggregate demand curve, and explain why it slopes downward;
      • analyze the factors leading to a shift of the aggregate demand curve;
      • graphically represent and interpret a short-run aggregate supply curve, and explain why it slopes upward;
      • analyze the factors leading to a shift of the short-run aggregate supply curve; and
      • graphically represent and interpret a long-run aggregate supply curve, and distinguish between short-run and long-run equilibrium.

    • 3.1: Aggregate Demand

      • Aggregate Demand and Aggregate Supply Book

        This chapter introduces the Aggregate Demand/Aggregate Supply model of macroeconomics. Read the introduction and Section 1 to learn about Aggregate Demand and the three effects (weath, interest rate, and international trade) that cause the downward slope. Recall the difference between quantity demanded and demand - the same logic applies to Aggregate Demand. Identify the variables that change (shift) the Aggregate Demand curve. Read this chapter and attempt the "Try It" exercises. You will revisit certain sections of the chapter later in this unit.

      • More on Aggregate Demand and Aggregate Supply Page

        The following three videos will help you get a good understanding of the Aggregate Demand curve and the factors that shift it. Later we will put Aggregate Demand and Aggregate Supply together on the same graph and will analyze the resulting equilibrium and its implications on the economy's health.

    • 3.2: Consumption, Investment, and the Aggregate Expenditures Model

      • Consumption and the Aggregate Expenditures Model Book

        Read this chapter to examine consumption and its determinants within the aggregate expenditures model. Consumption is the largest component of Aggregate Demand the United States, therefore, the factors that determine consumption, also determine the success of the economy.

      • Investment and Economic Activity Book

        Read this chapter to examine factors that determine private investment and its link to output within the macroeconomy. Private investment plays an important role in the short run by influencing aggregate demand, and in the long run by influencing the rate of growth of the economy.

      • More on the Aggregate Expenditure Model, and the Keynesian Cross Page

        The following videos explore the aggregate expenditure model in detail. You will analyze planned expenditures relative to actual output using the Keynesian Cross and will see how a change in government spending can lead to a new equilibrium. The model also introduces the spending multiplier and shows how it links aggregate demand factors with the ultimate level of GDP in the economy.

    • 3.3: Aggregate Supply In the Short-Run and the Long-Run

      • Aggregate Demand and Aggregate Supply: The Long Run and the Short Run Book

        Review section 2 of Aggregate Demand and Aggregate Supply chapter assigned in 3.1, about short run aggregate supply and the way it differs from long-run aggregate supply.

      • Short-Run Aggregate Supply and Long-Run Aggregate Supply Page

        The following videos will walk you through the definitions of Short-Run Aggregate Supply and Long-Run Aggregate Supply. Pay attention to what distinguishes the short-run from the long-run. What causes price and wage stickiness in the short-run and what are the implications for the shape of the supply curves. For example, the short-run aggregate supply curve slopes upward due to the lag between product prices and resource prices that makes it profitable for firms to increase output when the price level rises. The long-run aggregate supply curve is vertical when a country is at full employment. The long-run aggregate supply curve is vertical because, in the long run, resource prices adjust to changes at the price level, which leaves no incentive for firms to change their output. In the long run, prices and wages have no effect on the aggregate supply curve.