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In chapter 12 we develop a model of
the macroeconomy, the Aggregate Demand / Aggregate Supply
model (AS/AD), that we will use throughout the remainder of
the course. Remember from chapter 1 that the three
macroeconomics issues are unemployment (UE), inflation (IN),
and economic growth (EG). The AD/AS model will help us
understand changes in UE, IN, and EG.
In lesson 12a we briefly introduce
UE, IN, and EG and then develop the aggregate demand curve
(AD). In lesson 12b we will develop the aggregate supply
(AS) curve and then put them together to find a
macroeconomic equilibrium. Then, similar to what we did in
chapter 3, we will see that changes in the determinants of
AD or AS cause the curves to shift resulting in changes in
UE, IN, and EG. LEARN THE DETERMINANTS! See the Yellow Pages
for lists of the determinants and many practice exercises.
One last thing, even though the AS/AD
graph looks very similar to the supply and demand graph from
chapter 3, THEY ARE VERY DIFFERENT. Whereas in chapter 3 we
looked at the price and quantity of a SINGLE PRODUCT, in
macroeconomics we look at the price level and the
aggregate output in the WHOLE ECONOMY. We are not
just looking at one product, we are looking at the average
prices of ALL products and the quantities of ALL products
produced in an economy.
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