Chapter 22: Aggregate Demand and Aggregate Supply
1. Note to students that the large fraction of GDP that goes to consumption purchases explains why
2. Looking ahead, it is worth noting that changes in net taxes (taxes or transfer payments) do not change
the demand for goods and services directly, but indirectly, by changing disposable income to the
household sector, which changes consumption demand, which changes AD in the same direction.
3. As a prelude to the later discussion of stabilization issues, you might note to students that changes in
investment could reflect volatile private sector expectations or animal spirits, but they could also reflect
4. Note that a tax change that primarily affects households disposable incomes will primarily affect
5. It can be worth noting that, as in the Great Depression, net investment can actually be negative (when
depreciation of the existing capital stock exceeds new investment).
6. A good application of the role of expectations is to ask students why, whenever there is a recession,
7. Note that since the same arguments often apply to consumer durables as to investments, consumer
8. Make sure that students understand why we talk of net exports in our analysis, even when they are
negative, rather than net imports (net exports are the way foreign trade enters into AD).
9. You may want to show students why the fact that increases in net exports increase AD, leads countries
10. Make sure students see that the downward slope of AD is not for the same reason as the downward
11. Note that the magnitude of the real wealth effect is a function of how much of a country s wealth is
held in money, so this effect may be empirically small, if the fraction of wealth held as money is small.
13. Note to students how the open economy effect of a change in the domestic price level implies that
importers and exporters will disagree as to what appropriate price policy is with respect to changes in the
price level.
14. This is a good point to extend the results of microeconomic supply and demand to AS/AD logic. If
there is an increase in demand in some sector of the economy, prices in that industry (and the overall
15. Emphasize the relative speeds of adjustment in the AS/AD model. The goods and services (output)
16. Local supermarkets provide a good example to reinforce the short run output price change relative to
input price analysis: Output prices typically change weekly, with new newspaper ads, but the wages paid
to checkers may be determined by three year union contracts.
17. Note that the definition of the long run makes both the reasons for the upward sloping SRAS
18. To reinforce the idea of why the LRAS is vertical, it is often useful to show that if all prices doubled,
no relative prices would change, and if no relative prices changed, we would expect no change in
19. Remind students that the long run is however long it takes for full adjustment, so that an important
question for stabilization policy will be how long the long run is. The likelihood that government
20. Emphasize the importance of distinguishing between real and nominal variables when talking about
21. It is useful to remind students that the magnitudes of the AS/AD shifts we draw in the book or on a
blackboard are greater than in reality (e.g., a roughly 3% annual real economic growth rate), so that it is
easier to see the analysis graphically.
22. If, as many studies show, new technology takes many years before it substantially changes
23. Note that while tax rates don t affect the quantity of natural resources, technology, etc., directly, they
24. Note that in those cases where government regulations effectively address market failures, the value
25. Note that if a natural disaster destroyed much of an area s productive capacity or assets, there will be
26. Note that the reason for economists confidence that the AS–AD intersection meaningfully represents
27. A good analogy to temporarily producing beyond the LRAS is finals week, where students are willing
to supply more academic output than they are willing to on a sustainable basis.
28. It can be worth reminding students that AS/AD equilibrium does not mean that each individual
product market must be in equilibrium.
29. In contrasting cost-push versus falling AD recessions, make sure students see that real GDP and
30. Emphasize that the AS/AD model has different implications for each of three different time periods:
32. Note to students that even if the market s self-corrective mechanisms can handle one-time negative
AD shocks reasonably quickly, they can still be overwhelmed by a series of negative AD shocks, as
during the Depression.
33. A useful analogy to macroeconomic speed of adjustment issues is a marble placed off–center in a
perfectly round-bottomed bowl. With little friction (stickiness), the marble moves quickly to the bottom, but
34. The short run to the long run story in the macroeconomy (because of the lag before input markets
adjust) is very similar to the short run to the long run story in microeconomics (because of the lag before
profit incentives lead to entry or exit). The big difference is that long run supply curves are more elastic