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In this chapter, you will learn about:
  • Macroeconomic Perspectives on Demand and Supply
  • Building a Model of Aggregate Demand and Aggregate Supply
  • Shifts in Aggregate Supply
  • Shifts in Aggregate Demand
  • How the AD/AS Model Incorporates Growth, Unemployment, and Inflation
  • Keynes’ Law and Say’s Law in the AD/AS Model

New home construction

This photograph shows a new house under construction.
At the peak of the housing bubble, many people across the country were able to secure the loans necessary to build new houses. (Credit: modification of work by Tim Pierce/Flickr Creative Commons)

From housing bubble to housing bust

The United States experienced rising home ownership rates for most of the last two decades. Between 1990 and 2006, the U.S. housing market grew. Homeownership rates grew from 64% to a high of over 69% between 2004 and 2005. For many people, this was a period in which they could either buy first homes or buy a larger and more expensive home. During this time mortgage values tripled. Housing became more accessible to Americans and was considered to be a safe financial investment. [link] shows how new single family home sales peaked in 2005 at 107,000 units.

New single family houses sold

The figure shows that single family house sales were highest in 2005 (to over 12,000 thousand) before plummeting drastically. In 2014, housing sales were over 400 thousand.
From the early 1990s up through 2005, the number of new single family houses sold rose steadily. In 2006, the number dropped dramatically and this dramatic decline continued through 2011. By 2014, the number of new houses sold had begun to climb back up, but the levels are still lower than those of 1990. (Source: U.S. Census Bureau)

The housing bubble began to show signs of bursting in 2005, as delinquency and late payments began to grow and an oversupply of new homes on the market became apparent. Dropping home values contributed to a decrease in the overall wealth of the household sector and caused homeowners to pull back on spending. Several mortgage lenders were forced to file for bankruptcy because homeowners were not making their payments, and by 2008 the problem had spread throughout the financial markets. Lenders clamped down on credit and the housing bubble burst. Financial markets were now in crisis and unable or unwilling to even extend credit to credit-worthy customers.

The housing bubble and the crisis in the financial markets were major contributors to the Great Recession that led to unemployment rates over 10% and falling GDP. While the United States is still recovering from the impact of the Great Recession, it has made substantial progress in restoring financial market stability through the implementation of aggressive fiscal and monetary policy.

The economic history of the United States is cyclical in nature with recessions and expansions. Some of these fluctuations are severe, such as the economic downturn experienced during Great Depression of the 1930’s which lasted several years. Why does the economy grow at different rates in different years? What are the causes of the cyclical behavior of the economy? This chapter will introduce an important model, the aggregate demand–aggregate supply model, to begin our understanding of why economies expand and contract over time.

Introduction to the aggregate supply–aggregate demand model

In this chapter, you will learn about:

  • Macroeconomic Perspectives on Demand and Supply
  • Building a Model of Aggregate Supply and Aggregate Demand
  • Shifts in Aggregate Supply
  • Shifts in Aggregate Demand
  • How the AS–AD Model Incorporates Growth, Unemployment, and Inflation
  • Keynes’ Law and Say’s Law in the AS–AD Model

A key part of macroeconomics is the use of models to analyze macro issues and problems. How is the rate of economic growth connected to changes in the unemployment rate? Is there a reason why unemployment and inflation    seem to move in opposite directions: lower unemployment and higher inflation from 1997 to 2000, higher unemployment and lower inflation in the early 2000s, lower unemployment and higher inflation in the mid-2000s, and then higher unemployment and lower inflation in 2009? Why did the current account deficit rise so high, but then decline in 2009?

To analyze questions like these, we must move beyond discussing macroeconomic issues one at a time, and begin building economic models that will capture the relationships and interconnections between them. The next three chapters take up this task. This chapter introduces the macroeconomic model of aggregate supply and aggregate demand , how the two interact to reach a macroeconomic equilibrium, and how shifts in aggregate demand or aggregate supply will affect that equilibrium. This chapter also relates the model of aggregate supply and aggregate demand to the three goals of economic policy (growth, unemployment, and inflation), and provides a framework for thinking about many of the connections and tradeoffs between these goals. The chapter on The Keynesian Perspective focuses on the macroeconomy in the short run, where aggregate demand plays a crucial role. The chapter on The Neoclassical Perspective explores the macroeconomy in the long run, where aggregate supply plays a crucial role.

Questions & Answers

what is deman
Andoh Reply
Demand is what consumer needs.
almas
not only that but also their ability to purchase what they need
Atanga
Demand is what consumers are willing to purchase and able to pay for.
Caleb
Demand is anything one can be able to purchase and possess at any given time.
elvis
demand is the ability and willingness to buy a specific quantity of goods and services, with the given price and at a particular period of time
Ibrahim
Demand for what is it for money or for goods, please specify.
MUNTARI
demand is the desire and ability of a consumer to acquire goods and services at a given price within a period of time
swallow
@muntari -pls this is economics class they are using economics term ok
Napoleon
demand means the ability to acquire a commodity with a strong purchasing power
okhiria
producer equilibrium under alternative market structure
Muhammad Reply
what is abnormal demand
Arabi Reply
Howdoes income affects the demand of a commodity
Kessie Reply
Is the slope of demand curve Negative or Positive
Kessie
Is the slope of demand curve Negative or Positive
Kessie
Is the slope of demand curve Negative or Positive
Kessie
Is the slope of demand curve Negative or Positive
Kessie
Is the slope of demand curve Negative or Positive
Kessie
income affects the demand of a commodity in two ways, that is positive and negative. increase in income results in positive effect, that is more units Will be demanded than before when the Price of the good remains constant. Negative effect, decrease in income results in less units Will be demanded.
Atanga
Negative
Atanga
Hi
Bayong
Request
Massoud
Nice info
Massoud
negative
Francis
Monopoly is a market structure where there is one firm who dominates the industry.In US monopoly is defined when a firm controls 25% of the market
Emmanuel Reply
Monopoly is a market structure where there is one firm who dominates the industry.In US a monopoly is defined when a firm controls 25% of the market.
Emmanuel
That's right but,we have to define it in African context.👏👏👏
MUNTARI
great time to do the same way about anyone else in mind
KANNEH
In Ghana for instance,The electricity company (ECG) enjoys monopolistic powers
Emmanuel
whether in africa or US monopoly is defined the same, the major thing to consider is the major ingridient of the subject which says a market structure were there is one firm who dominates the market or induatry.
Napoleon
Yeah We Must just appreciate that in that market there is one firm dominating the market or industry .
Emmanuel
are you sure... as I know it has firm dominant in some sectors
Dawal
Monopoly is a market situation with only one seller. A natural monopoly exists when the monopolist's solo position is due either to the exclusive possession of some essential input, or to the existence of economies of scale so that no entrant can be profitable once an incumbent firm is established.
Nureni
You guys are great.
MUNTARI
Thanks
Massoud
what is monopoly
Belinda Reply
the forces of dd and ss
Kemg Reply
how did you get 2900
mba Reply
what's equillibrium price
Begmee Reply
it is a Price at which there is no tendency for both the quantity demanded and quantity supplied to change.
Atanga
what is joint demand
Alejandro Reply
joint demand?
Isma
is when two commodities relate together
Emmanuel
it refers to the demand for two commodities that are jountly consumed or used together
Atanga
It is when commodities are used together
Addo
who is a conspicuous consumer
Atanga
what are subnormal profits in ecos
Tawe Reply
what is an ancient tiger
emmanuel Reply
The Four Asian Tigers, Four Asian Dragons or Four Little Dragons, are the economies of Hong Kong, Singapore, South Korea and Taiwan, which underwent rapid industrialization and maintained exceptionally high growth rates between the early 1960s and 1990s.
Napoleon
It is not correct.
Nelly
state ur own na mr correct
Napoleon
who told u?
Napoleon
u are correct
emmanuel
woow I never knew that
Birungi
ask
Foday
a
Foday
what is GDP
Lamin
gross domestic product
Tawe
I want to see unemployment essay
Mmonwa Reply
hello
Birungi
Inflation is defined as the rise in price of a commodity.
Nureni Reply
It is defined as the rise in price of a commodity.
Nureni
the persistent rise in the prices of goods and services. or commodities.
SULEIMAN
pls the third and fourth law of supply
Yarouh
what's GDP?
Allen
gross domestic product
Annor
GDP stands for Gross Domestic Product
Sande
yes
HlobisileM
what us maxima and minima
MiXUP Reply
Maxima s below equilibrium. Whilst minima s above. Equilibrium
Afran
Wht is demand
Afran
is the willingness and the ability of a consumer to purchase goods at a given price and at a particular point in time.
Assan
Ohhk different question? Ask
Afran
why is the demand curve downwards sloppy?
Assan
3 Reasons.. 1... diminishing marginal utility 2... substitution effect 3...income effect
Harshita
thanks
Assan
Because of the negative or inverse relationship between price and quantity demanded
Afran
what is the law of diminishing returns states?
Assan
ohk
Assan
The law states that all other things being equall as much of variable factor(labour) is employed on fixed factor(land) the marginal product rises..attain a maximum and begins to fall.
Afran
What is income elasticity of demand
Afran
what is monetary policy
Edward
Monetary policy is an attempt to influence the economy by opera ting in such monetary variables
Afran
thanks
Edward
Wlcm
Afran
Wht is disutility?
Afran
is disutility? is rightly writing?
Yhlas
is it i wanna say
Yhlas
Yes please Disutility
Afran
what is macro economics?
Oyas
the branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
idk
in other words it is the study of the economic as a whole
idk

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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