The Equation of Aggregate Demand Figure 16-1: Aggregate Demand as a Function of Output Aggregate demand D Aggregate demand function, D(EPIP,Y-T,I,G) 45° Output(real income),Y Copyright C 2003 Pearson Education, Inc Slide 16-16
Copyright © 2003 Pearson Education, Inc. Slide 16-16 Figure 16-1: Aggregate Demand as a Function of Output Output (real income), Y Aggregate demand, D Aggregate demand function, D(EP*/P, Y – T, I, G) 45° The Equation of Aggregate Demand
How Output Is Determined in the short run Output market is in equilibrium in the short-run when real output, Y, equals the aggregate demand for domestic output Y=D(EP*P,Y-T,LG (16-1) Copyright C 2003 Pearson Education, Inc Slide 16-17
Copyright © 2003 Pearson Education, Inc. Slide 16-17 How Output Is Determined in the Short Run ▪ Output market is in equilibrium in the short-run when real output, Y, equals the aggregate demand for domestic output: Y = D(EP*/P, Y – T, I, G) (16-1)
How Output Is Determined in the short run Figure 16-2: The Determination of Output in the Short Run Aggregate demand D Aggregate demand aggregate output, D=Y Aggregate demand y3 Output ,Y Copyright C 2003 Pearson Education, Inc Slide 16-18
Copyright © 2003 Pearson Education, Inc. Slide 16-18 Figure 16-2: The Determination of Output in the Short Run Output, Y Aggregate demand, D 45° Aggregate demand = aggregate output, D = Y Aggregate demand 2 Y2 D1 1 Y1 3 Y3 How Output Is Determined in the Short Run
Output market Equilibrium in the Short run The dd schedule Output, the Exchange Rate, and Output Market Equilibrium With fixed price levels at home and abroad, a rise in the nominal exchange rate makes foreign goods and services more expensive relative to domestic goods and services Any rise in g will cause an upward shift in the aggregate demand function and an expansion of output Any fall in g will cause output to contract Copyright C 2003 Pearson Education, Inc Slide 16-19
Copyright © 2003 Pearson Education, Inc. Slide 16-19 ▪ Output, the Exchange Rate, and Output Market Equilibrium • With fixed price levels at home and abroad, a rise in the nominal exchange rate makes foreign goods and services more expensive relative to domestic goods and services. – Any rise in q will cause an upward shift in the aggregate demand function and an expansion of output. – Any fall in q will cause output to contract. Output Market Equilibrium in the Short Run: The DD Schedule
Output market Equilibrium in the Short run The dd schedule Figure 16-3: Output Effect of a Currency Depreciation with Fixed Output Prices Aggregate demand D Currency Aggregate demand (E) depreciates Aggregate demand(E) 45 Y Output, Y Copyright C 2003 Pearson Education, Inc Slide 16-20
Copyright © 2003 Pearson Education, Inc. Slide 16-20 Output Market Equilibrium in the Short Run: The DD Schedule Figure 16-3: Output Effect of a Currency Depreciation with Fixed Output Prices Output, Y Aggregate demand, D 45° D = Y 1 Y1 Aggregate demand (E2 ) Aggregate demand (E1 ) Y2 2 Currency depreciates