Chapter 11 Outline
V. DETERMINING THE NATION'S OUTPUT AND PRICE LEVEL
A. Aggregate Demand
	1. The aggregate demand curve shows the total amount of final goods and services (real GDP) that will be purchased at each price level (GDP deflator).
	2. The aggregate demand curve slopes downward and to the fight.
	a. The real balance effect causes the aggregate demand curve to be negatively sloped.
		1. The real balance effect is the change in consumption caused by a change in the real value of financial assets that have fixed dollar values.
	b. Changes in the interest rate cause the aggregate demand curve to be negatively sloped.
		1. The impact of prices on real balances will affect the amount households and firms are willing to borrow, thereby affecting the interest rate.
		a. As the interest rate changes both consumption and investment will be affected.
	c. The effect of the price level on exports and imports causes the aggregate demand curve to be negatively sloped.
		1. Changes in the domestic price level will affect the relative price of exports and imports.
	3. Factors other than changes in the price level may cause the aggregate demand curve to shift.
	a. An increase in aggregate demand is represented as a rightward shift of the aggregate demand curve.
		1. An increase in aggregate demand may be caused by an increase in the level of optimism among households and firms or by expansionary fiscal and monetary policies.
		a. Fiscal policy is the use of government purchases and taxes to achieve full employment and other economic goals.
		1. Expansionary fiscal policy is an increase in aggregate demand caused by an increase in government purchases or a decrease in taxes.
		b. Monetary policy is the use of the money supply to achieve full employment and other economic goals.
		1. Expansionary monetary policy is an increase in the money supply.
	b. A decrease in aggregate demand is represented as a leftward shift of the aggregate demand curve.
		1. A decrease in aggregate demand may be caused by a decrease in the level of optimism among households and firms or by contractionan/ fiscal and monetary policies.
		a. Contractionary fiscal policy is a decrease in aggregate demand caused by a decrease in government purchases or an increase in taxes.
		b. Contractionary monetary policy is a decrease in the money supply.
B. Aggregate Supply
	1. The aggregate supply curve shows the total output of final goods and services(real GDP) that will be produced at each price level (the GDP deflator).
	2. The aggregate supply curve has two segments: a segment that is positively sloped up to the full employment level of output and a segment that becomes vertical at the full employment level of output.
	a. The positively sloped segment is derived on the assumption that wage rates and other input prices are constant.
	b. The vertical segment is derived on the assumption that wage rates and other input prices are variable.
	3. Factors other than a change in the price level can shift the aggregate supply curve.
	a. An increase in aggregate supply is represented as a rightward shift of the curve.
		1. A decrease in input prices will cause a rightward shift in the positively sloped portion of the aggregate supply curve.
		2. An increase in the nation's labor supply, capital stock, or technology will cause a rightward shift of the entire curve.
	b. A decrease in aggregate supply is represented as a leftward shift of the curve.
		1. An increase in input prices will cause a leftward shift in the positively sloped portion of the aggregate supply curve.
		2. A decrease in the nation's labor supply, capital stock, or technology will cause a leftward shift of the entire curve.
C. Aggregate Demand and Supply Interaction
	1. The intersection of aggregate demand and supply determines the equilibrium levels of real GDP and the GDP deflator.
	a. If the price level is below the equilibrium price level, aggregate quantity demanded will exceed aggregate quantity supplied and there will be an upward pressure on prices.
	b. If the price level is above the equilibrium price level, aggregate quantity supplied will exceed aggregate quantity demanded and pressure on prices.
	2. Equilibrium does not mean that real GDP will be at its full employment level.
	a. Decreases in aggregate demand can lead to unemployment.

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