So now let's see what an increase in aggregate demand does. We call this demand pull inflation. You'll see why when we get into it. We're going to see that the prices are going to be going up with this increase in aggregate demand. Okay? It's going to shift leading to higher long run equilibrium price. Okay? So let's go ahead and get down to the graph and let's see how a shift in our aggregate demand to the right is going to affect our long run equilibrium. So, in this example, we're saying there's an increase in defense spending by the government. Okay? So, there's an increase in government purchases and remember government purchases are a part of our aggregate demand, right? We have consumption, investment, government spending, and net exports. So, if the government spending is going up, our aggregate demand is going to shift to the right. So let's go ahead and start with our star-shaped equilibrium for the original situation. Right? And you're going to notice this is how a lot of these go. We're just going to start with an equilibrium and see what happens when we shift. So here's our downward demand, known as double Ds, Short run aggregate supply, and long run aggregate supply. Okay? So here's our original equilibrium right here where we have this price level, price level 1, and GDP 1. Right? Our long run GDP equilibrium, and now we're going to shift our aggregate demand to the right. So our increase in defense spending by the government is going to shift our aggregate demand to the right, and we're going to have a new aggregate demand curve somewhere out here. Okay? Aggregate demand. So this was aggregate demand 1. Here's aggregate demand 2. Okay? So where's our short run equilibrium going to be? Can you guys find it? Well, it's where our new aggregate demand curve touches our short run aggregate supply curve. That's going to be right here where the red line crosses the short run aggregate supply curve right at this point right here. This is our short run equilibrium. Short run. I'll put EQ, short run equilibrium for our short run, equilibrium right there. So what's happened to the price level in the short run? The shift in aggregate demand is going to increase our prices, right? There's more demand for all the goods and services available, so it's going to push the prices up and that's why we call it the demand pull inflation. The demand is pulling those prices up in this situation leading to a higher level of GDP. And notice what's happening at this point. This GDP is beyond our long run equilibrium. How is that even possible? Well, the trick here is that it shouldn't be possible. But what's happening is that there's over-employment in the economy. There's overuse of our resources that's actually leading to what we call a hot economy. We're actually past our long run equilibrium for a short period of time here. In this short run, what we're seeing is that there's over-employment. Maybe people are working. There's a little bit higher wages or something causing people to work more. Businesses are seeing more profit and they're able to justify, having this higher higher than normal GDP beyond our potential GDP in the long run, okay? So in the short run, we're able to push the price level up and the GDP past our long run equilibrium there. Alright, so now that we found our short run equilibrium, what did we say was going to happen? The final step is that the short run aggregate supply is going to react to get us back to our long run equilibrium. So in this case, our aggregate demand has shifted to the right. What's going to happen with our short run aggregate supply? It's going to shift to the left, right? So now, we're going to draw a new short run aggregate supply where this was our 1st short run aggregate supply. Let's draw a new one. And remember, we're going to be keeping our long run aggregate supply constant in these examples. So we're looking to find our this point right here. That is going to be our new long run equilibrium where our aggregate demand curve is touching that long run equilibrium. So what we're going to do is we're going to draw a new short run aggregate supply to the left here that goes through that point. Let me draw it a little better. Just like that and that's going to be our new short run aggregate supply that remember, it takes a little time for this shift to occur for it to adjust back into our long run equilibrium. So now, we've reached our long run equilibrium up here. Long run equilibrium. And what's happened to the price? Because of this increase in aggregate demand, what we have another increase in the price and our long run equilibrium has a higher price level at the same long run GDP here. Okay? So what's happened here? In the short run, we had higher price higher GDP, right? We were able to push past our long run equilibrium GDP And in the long run, what's happening here? The price increases again, higher price, back to our stable amount of long run GDP there. Okay? So we're back to this GDP, our long run equilibrium GDP, GDP 1 in this situation. Cool? So notice, this isn't too tough. We're following that 3 step process. 1st, we're going to shift the aggregate demand either left or right. We're going to find our new equilibrium in the short run and then we're going to shift the short run aggregate supply the opposite way from the aggregate demand. All right? Let's pause here and let's move on.
Table of contents
- 1. Introduction to Macroeconomics1h 57m
- 2. Introductory Economic Models59m
- 3. Supply and Demand3h 43m
- Introduction to Supply and Demand10m
- The Basics of Demand7m
- Individual Demand and Market Demand6m
- Shifting Demand44m
- The Basics of Supply3m
- Individual Supply and Market Supply6m
- Shifting Supply28m
- Big Daddy Shift Summary8m
- Supply and Demand Together: Equilibrium, Shortage, and Surplus10m
- Supply and Demand Together: One-sided Shifts22m
- Supply and Demand Together: Both Shift34m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 26m
- Percentage Change and Price Elasticity of Demand19m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Price Floors3h 40m
- Consumer Surplus and WIllingness to Pay33m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Floors: Finding Areas54m
- 6. Introduction to Taxes1h 25m
- 7. Externalities1h 3m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. Introducing Economic Concepts49m
- Introducing Concepts - Business Cycle7m
- Introducing Concepts - Nominal GDP and Real GDP12m
- Introducing Concepts - Unemployment and Inflation3m
- Introducing Concepts - Economic Growth6m
- Introducing Concepts - Savings and Investment5m
- Introducing Concepts - Trade Deficit and Surplus6m
- Introducing Concepts - Monetary Policy and Fiscal Policy7m
- 11. Gross Domestic Product (GDP) and Consumer Price Index (CPI)1h 37m
- Calculating GDP11m
- Detailed Explanation of GDP Components9m
- Value Added Method for Measuring GDP1m
- Nominal GDP and Real GDP22m
- Shortcomings of GDP8m
- Calculating GDP Using the Income Approach10m
- Other Measures of Total Production and Total Income5m
- Consumer Price Index (CPI)13m
- Using CPI to Adjust for Inflation7m
- Problems with the Consumer Price Index (CPI)6m
- 12. Unemployment and Inflation1h 22m
- Labor Force and Unemployment9m
- Types of Unemployment12m
- Labor Unions and Collective Bargaining6m
- Unemployment: Minimum Wage Laws and Efficiency Wages7m
- Unemployment Trends7m
- Nominal Interest, Real Interest, and the Fisher Equation10m
- Nominal Income and Real Income12m
- Who is Affected by Inflation?5m
- Demand-Pull and Cost-Push Inflation6m
- Costs of Inflation: Shoe-leather Costs and Menu Costs4m
- 13. Productivity and Economic Growth1h 17m
- 14. The Financial System1h 37m
- 15. Income and Consumption52m
- 16. Deriving the Aggregate Expenditures Model1h 22m
- 17. Aggregate Demand and Aggregate Supply Analysis1h 18m
- 18. The Monetary System1h 1m
- The Functions of Money; The Kinds of Money8m
- Defining the Money Supply: M1 and M24m
- Required Reserves and the Deposit Multiplier8m
- Introduction to the Federal Reserve8m
- The Federal Reserve and the Money Supply11m
- History of the US Banking System9m
- The Financial Crisis of 2007-2009 (The Great Recession)10m
- 19. Monetary Policy1h 32m
- 20. Fiscal Policy1h 0m
- 21. Revisiting Inflation, Unemployment, and Policy46m
- 22. Balance of Payments30m
- 23. Exchange Rates1h 16m
- Exchange Rates: Introduction14m
- Exchange Rates: Nominal and Real13m
- Exchange Rates: Equilibrium6m
- Exchange Rates: Shifts in Supply and Demand11m
- Exchange Rates and Net Exports6m
- Exchange Rates: Fixed, Flexible, and Managed Float5m
- Exchange Rates: Purchasing Power Parity7m
- The Gold Standard4m
- The Bretton Woods System6m
- 24. Macroeconomic Schools of Thought40m
- 25. Dynamic AD/AS Model35m
- 26. Special Topics11m
17. Aggregate Demand and Aggregate Supply Analysis
AD-AS Model: Shifts in Aggregate Demand
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