Chapter 23
Aggregate Demand and Supply Analysis
The basic tool used to analyze the role of money in the economy in this book is a dynamic
aggregate demand and supply analysis. The aggregate demand/aggregate supply model in this
book differs from that in many other textbooks because it is inherently dynamic and emphasizes
the interaction of inflation and economic activity. In contrast to older AD/AS frameworks that
have the price level on the vertical axis, the dynamic AD/AS approach in this textbook has
inflation on the vertical axis.
The chapter starts with a recap of the aggregate demand curve. There are two reasons for doing
so. First, it drives home the intuition behind the aggregate demand curve, and recaps like this
are a good way of getting students to really understand the material. Second, many instructors
who are pressed for time might not want to go into so much detail about the derivation of the
aggregate demand curve and so would prefer to skip Chapters 21 and 22. The recap in Chapter
aggregate supply curve is a vertical line determined by the amount of capital in the economy,
the amount of labor supplied at full (the natural rate level of) employment, and the available
technology. It develops the short-run aggregate supply curve using the intuition that there are
three factors that drive inflation: (1) expectations of inflation, (2) output gap, and (3) price
(supply) shocks. The Summary Table 2 can be used to hone students’ intuition by listing changes
because over time, a sequence of short-run equilibria lead the economy to go to the long-run
equilibrium at which output returns to potential and the economy is at full employment.
The rest of the chapter shows how inflation and equilibrium output changes as a result of either
aggregate demand shocks or aggregate supply (inflation) shocks. To drive home the analysis and
also show students how useful the AD/AS model is, the chapter goes through a large number of
ones he or she would like to teach in class. However, I think there is nothing more fun than to
explain important historical episodes, which all of the applications do, and show how powerful
economic models can be used to explain real-world phenomena.
In order to bring international factors into the aggregate demand and supply analysis of the
chapter, net exports are included in the definition of aggregate demand. This enables the
are interested in pursuing careers in finance. It shows how the AD/AS model can explain how
macroeconomic events that students are seeing reported in the media every day affect both stock
prices and interest rates. The second appendix in MyLab Economics provides a numerical
example of aggregate demand and supply analysis, while the third, “The Algebra of the
Aggregate Demand and Supply Model,” develops all the results described in the chapter