Aggregate demand is the sum of all expenditures on final goods and services produced in the economy.
It demonstrates the relationship between the volume of total output demanded by economic agents and the general price level in the economy.
In the structure of aggregate demand we can distinguish:
- demand for consumer goods and services;
- demand for investment goods;
- demand for goods and services from the state;
- net export demand is the difference between foreigners' demand for domestic goods and domestic demand for foreign goods.
The aggregate demand curve superficially resembles the demand curve in a separate market, but it is constructed in a different coordinate system (Fig. 12.1). The abscissa axis indicates the values of the real volume of national production, denoted by the letter Y. The y-axis does not show absolute price indicators (for example, in billion rubles), but the price level (R), or deflator.
Figure No. 12.1. Aggregate demand curve.
Moving along a curve AD demonstrates changes in aggregate demand depending on the dynamics of the general price level.
The most simple expression of this dependence can be obtained from the equation of the quantity theory of money: 
from here or where M- the amount of money in the economy; V- speed of circulation of money; R- price level in the economy; Y- the real volume of output for which there is demand.
Negative slope AD explained as follows: the higher the price level R, the lower the real cash reserves M/P(curve HELL is built subject to a fixed supply of money M and the speed of their circulation V), and, consequently, the quantity of goods and services for which there is demand is smaller.
The downward trajectory (negative slope) of the aggregate demand curve is also determined by:
- interest rate effect;
- wealth effect, or cash balance effect;
- effect of import purchases.
Interest rate effect will be through the impact of changing price levels on interest rates and, consequently, on consumer spending and investment. If we consider the money supply constant, then an increase in the price level automatically increases the demand for money, which means the interest rate rises. In turn, the higher the interest rate, the more consumers begin to save money and make fewer purchases. As a result, private savings increase. The rise in credit prices actively forces entrepreneurs to reduce investments - production purchases. Thus, demand from both private consumers and entrepreneurs is reduced, which leads to a decrease in the aggregate demand for the real national product. Curve AD acquires a descending character and approaches the abscissa axis.
Wealth effect or real cash balances, will have a negative impact of inflation on household incomes. People's wealth in the form of fixed incomes decreases in inverse proportion to inflation. These are urgent accounts, bonds, wages, rent, pensions, benefits.
It is worth noting that the residual purchasing power of people, individuals and legal entities is called real cash balances. By cutting consumer spending in this way, they directly influence aggregate demand downward.
Effect of import purchases means that with an increase in the price level in the country, foreign-produced goods and services become relatively cheaper (other things being equal). The population will purchase fewer domestic goods and more imported ones. Foreigners will reduce their demand for goods and services of a given country due to their rise in price. Consequently, there will be a decrease in exports and an increase in imports and overall net exports will decrease, reducing total aggregate demand.
These effects have no impact on aggregate demand through prices, which is why the point moves along the aggregate demand curve. Under the influence of all non-price factors, the curve AD shifts to the right and left depending on the direction of action of the factor (Fig. 12.2) On the graph, an increase in aggregate demand is represented by a deviation of the curve to the right - from AD1 To AD2. This shift indicates that at different price levels the desired quantity of goods and services will increase. A decrease in aggregate demand is represented by a deviation of the curve to the left - from ADX To ADy This shift suggests that people will buy less of a product than before at different price levels. 
Figure No. 12.2. Changes in aggregate demand.
Non-price factors influencing aggregate demand:
- changes in consumer spending:
- consumer welfare;
- consumer expectations;
- consumer debt;
- taxes;
- changes in investment costs:
- interest rates;
- expected returns on investment;
- business taxes;
- technology;
- excess capacity;
- changes in government spending;
- changes in net export expenditures:
- national income in foreign countries;
- exchange rates.
Aggregate supply and factors determining it
Aggregate supply is the total quantity of final goods and services produced in an economy (in value terms). This concept is often used as a synonym for gross national (or domestic) product.
AS(from English aggregate supply) shows what volume of total output can be offered to the market by producers at different values of the general price level in the economy. Curve Shape AS interpreted differently in the classical and Keynesian schools. The classical school believes that the aggregate supply curve AS vertical, Keynesian school - either horizontal or having a positive slope.Modern economics believes that at various stages of the reproduction process there can be three forms of the aggregate supply curve, which can be combined into one curve. Graphically ϶ᴛᴏ is presented in Fig. 12.3. 
Figure No. 12.3. Aggregate supply curve.
- horizontal, or Keynesian;
- ascending or intermediate;
- vertical, or classic.
The first section of the curve indicates that the economy is in a state of recession, crisis: there is an underutilization of production capacity, a fixed level of prices and wages, a significant level of unemployment, i.e. the economy is characterized by the presence of excess resources that are not used.
In this situation, growth in output can be ensured by bringing into play unused resources and thus not putting any pressure on the price level. Thus, producers can purchase labor and other resources at fixed prices, costs per unit of production will not increase when expanding production, and, therefore, there will be no reason to increase prices for goods.
The second section is characterized by the fact that a change in the real volume of production significantly causes a change in prices. In this area of production, additional resources are involved, and less efficient ones, since the expansion of production implies that some firms will have to use old and less efficient equipment, hire less qualified workers, etc. Therefore, costs per unit of production increase and manufacturers must set higher prices for goods so that production would be profitable.
The third section of the curve demonstrates the state of the economy in which its production capabilities are almost completely used. This is expressed in full employment, maximum utilization of production capacity and, consequently, in the impossibility of further growth of production. Since the economy is running at full capacity, any increase in prices will not lead to an increase in real output. The aggregate supply curve establishes the relationship between the price level and the real volume of national production, other things being equal. But when these conditions (they are called non-price factors of aggregate supply)
- change, the aggregate supply curve shifts. To non-price factors of aggregate supply ᴏᴛʜᴏϲᴙт:
- change in resource prices:
- internal resources (labor, land, capital, entrepreneurial abilities);
- external (imported) resources;
- market dominance;
- changes in labor productivity;
- legal changes:
- business taxes and subsidies;
When one or more factors change, the cost per unit of output at a given price level also changes. A decrease in unit costs shifts the aggregate supply curve to the right. Conversely, an increase in unit costs shifts the aggregate supply curve to the left.
Curve offset from AS1 To AS2 in Fig. 12.4 indicates an increase in aggregate supply. In the intermediate and classic segments of the aggregate supply curve, it shifts to the right, indicating that more real national output will be produced than before at a given price level. 
Figure No. 12.4. Changes in aggregate supply.
On the Keynesian portion of the curve, an increase in aggregate supply means a decrease in the price level at different levels of national output. Curve offset from AS1 To AS3 to the left indicates a decrease in aggregate supply. At the intermediate and classic segments of the aggregate supply curve, less real national output will be produced than before at a given price level. On the Keynesian portion of the curve, a decrease in aggregate supply means an increase in the price level at different levels of national output.
- ϶ᴛᴏ the total quantity of goods and services that can be offered by the business and public sectors at a certain price level. Aggregate supply can be equated to the value of the gross national product or to the value of national income:
The amount of aggregate supply is also influenced by various factors. Changes in resource prices. Their increase leads to an increase in production costs and, as a result, to a decrease in aggregate supply. Labor productivity growth leads to an increase in production volume and, consequently, to an expansion of aggregate supply. Changing business conditions(taxes, subsidies) When taxes increase, costs increase, aggregate supply decreases.
The state of the national economy, in which there is an overall proportionality between: resources and their use; production and consumption; material and financial flows - characterizes general (or macroeconomic) economic equilibrium(OER) In other words, ϶ᴛᴏ optimal implementation of aggregate economic interests in society. The idea of such balance is obvious and desired by the entire society, since it means complete satisfaction of needs without unnecessarily expended resources and unsold products. A market economy, built on the principles of free competition, has economic mechanisms of self-regulation and the ability to achieve an equilibrium state through flexible prices, especially in conditions close to perfect competition, as well as in the long term.
Graphically, macroeconomic equilibrium will mean the combination of curves in one figure AD And AS and their intersection at a certain point. The relationship between aggregate demand and aggregate supply (AD–AS) gives a characteristic of the value of national income at a given price level, and in general - equilibrium at the level of society, i.e. when the volume of products produced is equal to the total demand for it. By the way, this model of macroeconomic equilibrium is basic. Curve AD may cross the curve AS in different areas: horizontal, intermediate or vertical. Therefore, there are three options for possible macroeconomic equilibrium (Fig. 12.5) 
Figure No. 12.5. Macroeconomic equilibrium: AD–AS model.
Dot E3- ϶ᴛᴏ equilibrium with underemployment without increasing the price level, i.e. without inflation. Dot E1- ϶ᴛᴏ equilibrium with a slight increase in the price level and a state close to full employment. Dot E2- ϶ᴛᴏ equilibrium under conditions of full employment, but with inflation.
Let us study how equilibrium is established when the aggregate demand curve intersects the aggregate supply curve in the intermediate section at the point E(Fig. 12.6) 
Figure No. 12.6. Establishment of macroeconomic equilibrium.
The intersection of the curves determines the equilibrium price level RE and the equilibrium level of national production Q.E. To show why RE represents the equilibrium price, a QE- equilibrium real volume of national production, assume that the price level is expressed by the quantity P1, but not P.E. Along the curve AS we determine that at the price level P1 the real volume of national product will not exceed YAS, while domestic consumers and foreign buyers are ready to consume it in volume YAD.
Competition among buyers for the opportunity to purchase a given volume of production will have an increasing impact on the price level. In the current situation, a completely natural reaction of producers to an increase in the price level will be to increase production volume. Through the joint efforts of consumers and producers, the market price, with a marked increase in production volume, will begin to increase to the value RE, when the real volumes of purchased and produced national product are equal and equilibrium comes to the economy.
In reality, there are constant deviations from the desired stable equilibrium under the influence of various factors - both objective and subjective. These include, first of all, the inertia of economic processes (the inability of the economy to instantly respond to changes in market conditions), the influence of monopolies and excessive government intervention, the activities of trade unions, etc. These factors prevent the free movement of resources, the implementation of the laws of supply and demand and other integral market conditions .
A prerequisite for macroeconomic analysis will be the aggregation of indicators. The aggregate supply of goods at equilibrium is balanced by aggregate demand and represents the gross national product of society.
The equilibrium national product is ensured by establishing the equilibrium aggregate price for the produced product, which is carried out at the intersection point of the aggregate demand and aggregate supply curves. Achieving equilibrium output under conditions of always existing resource limitations will be the goal of national economic policy.
All the main problems of society are in one way or another connected with the discrepancy between aggregate demand and aggregate supply.
According to the classical model, which describes the functioning of the economy in the long run, the quantity of products produced depends only on the costs of labor, capital and available technology, but does not depend on the price level.
In the short run, prices for many goods are inflexible. It is worth noting that they “freeze” at a certain level or change little. Firms do not immediately lower the wages they pay, and stores do not immediately revise the prices of the goods they sell.
Let us study the change in the equilibrium state of the economy separately under the influence of aggregate demand and aggregate supply. With a constant aggregate supply, a shift of the aggregate demand curve to the right leads to different consequences depending on where in the aggregate supply curve it occurs (Fig. 12.7) 
Figure No. 12.7. Consequences of an increase in aggregate demand.
In the Keynesian segment (Fig. 12.7 a), characterized by a high level of unemployment and a large amount of unused production capacity, the expansion of aggregate demand (from AD1 before AD2) Y1 To Y2) and employment without increasing the price level ( P1) In the intermediate segment (Fig. 12.7 b) expansion of aggregate demand (from AD3 before AD4) will lead to an increase in real national production (from Y3 To Y4) and to an increase in the price level (from P3 before P4)
On the classic segment (Fig. 12.7 c), labor and capital can be fully used, and the expansion of aggregate demand (from AD5 before AD6) will lead to an increase in the price level (from P5 before P6) and the real volume of production will remain unchanged, that is, it will not go beyond its level at full employment.
When the aggregate demand curve shifts backwards, the so-called ratchet effect(“ratchet” is a mechanism that allows the wheel to be turned forward, but not backward) Its essence is essentially that prices rise easily, but do not tend to decline when aggregate demand decreases. This is due, firstly, to the inelasticity of wages, which does not tend to fall at least for some period of time, and, secondly, many firms have sufficient monopoly power to resist falling prices during the period reduction in demand. We show the effect of this effect in Fig. 12.8, where for simplicity we omit the intermediate segment of the aggregate supply curve. 
Figure No. 12.8. Ratchet effect.
With an increase in aggregate demand from AD1 before AD2 the equilibrium position will shift from E1 before E2, and real production volume will increase from Y1 To Y2, and the price level is from P1 before P2. If aggregate demand moves in the opposite direction and decreases from AD2 before AD1 the economy will not return to its original equilibrium position at the point E1 and a new equilibrium will arise (E3), at which price level will remain P2. Output will fall below its original level to Y3. The ratchet effect causes the aggregate supply curve to shift from P1aAS before P2E2AS.
The shift in the aggregate supply curve also affects the equilibrium price level and the real volume of national production (Fig. 12.9) 
Figure No. 12.9. Consequences of changes in aggregate supply.
It is important to note that one or more non-price factors change, causing aggregate supply to increase and the curve to shift to the right, from AS1 before AS2. The graph shows that a shift in the curve will lead to an increase in real national output from Y1 To Y2 and a decrease in the price level from P1 before P2. A shift in the aggregate demand curve to the right indicates economic growth. The shift of the aggregate supply curve to the left of AS1 before AS3 will lead to a decrease in the real volume of national production from Y1 To Y3 and an increase in the price level from P1 before P3, i.e. to inflation.
We can say that in its most general form, economic equilibrium is the balance between the limited available resources (land, labor, capital, money), on the one hand, and the growing needs of society, on the other. The growth of social needs has traditionally outpaced the increase in economic resources. Therefore, equilibrium is usually achieved either by limiting needs (effective demand) or by expanding capacity and optimizing the use of resources.
There are partial and general equilibrium. Partial equilibrium is a quantitative balance between two interrelated macroeconomic parameters or individual aspects of the economy. This is, for example, the balance of production and consumption, budget income and expenditure, supply and demand, etc. In contrast to partial general economic balance means the stability and coordinated development of all spheres of the economic system. The most important prerequisites for OER are the following:
- ϲᴏᴏᴛʙᴇᴛϲᴛʙie national goals and existing economic opportunities;
- the use of all economic resources - labor, money, fixed assets, i.e. ensuring a normal level of unemployment and optimal reserves of capacity without allowing an abundance of idle capacity, mass unemployment, unsold goods, as well as excessive tension of resources;
- bringing the production structure into line with the consumption structure;
- ϲᴏᴏᴛʙᴇᴛϲᴛʙie aggregate demand and aggregate supply in all four types of markets - goods, labor, capital and money.
It should also be noted that OER models will differ for closed and open economies, in the latter case taking into account factors external to a given national economy - exchange rate fluctuations, foreign trade conditions, etc.
Macroeconomic equilibrium cannot be considered as a static state; it is very dynamic and is unlikely to be achievable in principle, like any ideal state. Cyclical fluctuations are inherent in any economic system. But society is interested in ensuring that deviations from the ideal equilibrium (or balance) of economic interests are minimal, since too large fluctuations can lead to irreversible consequences - to the destruction of the system as such. Therefore, compliance with the conditions of macroeconomic equilibrium will be the basis for the socio-economic stability of a particular state.
1. Aggregate demand is the total volume of goods and services on a national scale that consumers, businesses and the government can purchase at the current price level.
2. Aggregate supply - the total quantity of goods and services that can be offered by the business and public sectors at a certain price level.
3. Economic development is always associated with an imbalance, with a deviation from the average indicators of economic dynamics.
4. Economic equilibrium is the balance between the limited available resources (land, labor, capital, money), on the one hand, and the growing needs of society, on the other.
Aggregate offer- the real output in the economy (GDP) that producers are willing and able to offer at each possible price level. Economists debate the shape of the aggregate supply curve. Typically, the aggregate supply curve is presented in the form of three segments, reflecting the relationship between the price level and the amount of aggregate supply. This relationship can be shown graphically.
On the AS graph we can highlight three segments:I— horizontal (Keynesian) segment ; II - vertical (classic) segment ; III— ascending (intermediate) segment .
For Keynesian segment A typical situation is when the maximum possible volume of national production Qmax has not been achieved. It is obvious that there is an underutilization of production capacity and significant unemployment, i.e. the economy operates under conditions of underemployment and is in a crisis or depression phase of the economic cycle.
In a state of crisis or depression, the economy can increase production volumes without a noticeable increase in prices for manufactured products. An increase in production volumes in the period up to Q1 with almost zero price growth is possible through the use of free economic resources, which, due to the crisis in the economy, “fell out” of the process of social reproduction. All these resources can be involved in production at constant resource market prices. And since entrepreneurs purchase economic resources at fixed prices, their costs of producing a unit of output do not increase as output expands. The level of production costs per unit of production does not actually change, which means that the prices for the goods created will be constant.
Classic site The aggregate supply schedule assumes that the economic system has reached its production possibilities curve, that is, it operates under conditions of full employment of all economic resources. This means that the maximum possible volume of domestic production Qmax (potential GDP) for a given economy has been achieved. Thus, the economic system is in the upswing phase of the business cycle. In this area, any change in the price level in the economy will not lead to a change in the real volume of production in the economy.
The classical portion of the aggregate supply curve was studied by classical economists. According to classical economists, a market economy is characterized by a state of full employment, which is achieved automatically.
Intermediate segment graph AS reflects the situation of a parallel increase in both production volumes and the price level in the economy (indicators change respectively from Q1 to Q max and from P1 to P2). Such joint dynamics of these two indicators can be explained by the following reasons.
Firstly , uneven development of the national economy across industries and regions. Full employment is achieved unevenly - in some sectors there may be a shortage of resources, in others, on the contrary, there will be a surplus. The latter will experience stagnation. In the first group of industries, an increase in demand for resources will be accompanied by an increase in prices for production factors, and, consequently, an increase in average costs and prices for finished products. In another group of industries, average costs remain constant.
Secondly , the growth of production volumes in the interval from Q1 to Q max requires the involvement of more and more previously unoccupied economic resources in the reproduction process. As we move forward and approach Q max, the quality of these resources decreases, i.e., they are less productive (than, for example, in the Keynesian sector, when the highest quality and most suitable economic resources were attracted to increase production). Consequently, an increase in production volumes will be associated with rising costs, and consequently, with rising prices.
Until now, the analysis has not taken into account non-price factors of aggregate supply, but has studied the relationship between the price level in the economy and the real volume of products produced in society. The action of non-price factors leads to changes in aggregate supply.
The AS line may be influenced non-price factors change your position on the plane.
If it shifts to the right, then aggregate supply is said to increase. In this case, at the classic and intermediate stages, there actually is an increase in production volumes at each possible price level. In the Keynesian segment, the price level decreases at each level of production in the economy. If the AS curve shifts to the left to position AS2, then aggregate supply decreases.
The main non-price factors of aggregate supply have one common property - any shift in the AS curve is always associated with a change in the cost of producing a unit of output. To the mainnon-price factorsaggregate supply include:
1. Current prices for economic resources . An increase in resource prices leads to an increase in production costs, therefore, aggregate supply will decrease and the AS schedule will shift to the left. It should be noted that the price level for economic resources, in turn, also depends on a number of factors. In particular, we can mention the availability of internal resources in the country. As their number increases, the production possibilities curve of society will shift to the right, and the AS schedule will shift in the same direction (aggregate supply will increase). Prices for imported resources and their fluctuations, the degree of monopolization of factor markets, the efficiency of use of economic resources and other factors can affect resource prices and average production costs, and therefore aggregate supply.
2. Performance level economic resources and the effectiveness of the technologies used. Resource productivity is defined as the relationship between an economy's output and resource inputs. If the productivity of resources increases, then average costs decrease and aggregate supply increases. The productivity of economic resources depends on many factors - the quantity and quality of other resources, the level of production technology, specialization of resources, the level of qualifications of the workforce, and features of economic management. The introduction of new technologies increases the productivity of production factors and reduces unit costs. This contributes to the growth of aggregate supply, its graph will shift to the right.
3. Level of taxes, subsidies and subsidies. An increase in taxes on the business sector will lead to a decrease in profits. The natural consequence of this will be a reduction in aggregate supply - the AS schedule will shift to the left. Conversely, subsidies and grants to business from the state budget will reduce production costs and stimulate the growth of aggregate supply - the AS graph will shift to the right.
4. Measures of state regulation of the economy. As a rule, the expansion of government participation in economic life is accompanied by an increase in firm costs and a reduction in aggregate supply. This will be most clearly manifested in the case of direct administrative intervention of the state in the economy.
The impact of non-price factors on aggregate supply will be accompanied by a shift in the AS curve. At the same time, they talk about a change in aggregate supply. If we are talking about price factors (i.e., changes in the price level in the economy), then the amount of aggregate supply will change.
The position of the AS graph on the plane will not change here, but the combination will change “the price level in the economy is the volume of GDP offered for sale.”
Aggregate offer(AS) is the volume of goods and services produced in the economy as a whole in a given year and offered by enterprises on the market to the population, the state and each other at a given price level.
Aggregate supply and its quantity can be depicted graphically using an aggregate supply curve. If we mark the price level (P) vertically and output (Y) horizontally, that is, GDP, then, taking different values of the price level and output, we can construct the aggregate supply curve AS (Fig. 2 Short-Run Aggregate Supply Curve).
In macroeconomic theory, the aggregate supply curve distinguishes three segments that differ from each other in price behavior:
1. horizontal line segment (Keynesian),
2. intermediate line segment (ascending),
3. vertical line segment (classical).
On horizontally m segment of the aggregate supply curve, the price level remains unchanged even if the volume of national production increases.
This is possible if GDP is significantly lower than potential volume. This situation means that the economy has a significant level of unemployment and underutilization of production capacity. As GDP increases, the level of unemployment and capacity underutilization decreases. But this reduction does not lead to an increase in the price level; idle labor and equipment are put into operation at existing prices, and production costs do not change.
As idle resources are exhausted, the level of GDP approaches potential, the level of employment approaches full employment and the economy begins to function at intermediate segment of the aggregate supply curve. In this segment, rising prices lead to an increase in the scale of production and aggregate supply. Difficulties arise due to lack of resources. And if aggregate demand continues to grow, then aggregate supply will increase if additional resources are found. Demand for resources increases and resource prices rise, leading to higher production costs. Producers will only scale up production if the prices of their products also increase to compensate for the cost of more expensive inputs. All this explains the fact that with an increase in the price level, aggregate supply in the intermediate segment also increases. The growth of production costs underlies the direct relationship between the price level and the amount of aggregate supply.
On vertical(classical) segment of the aggregate supply curve, the price level in the economy increases, but the amount of aggregate supply remains unchanged. GDP has reached full employment levels. The economy is unable to provide additional resources. They are exhausted, therefore, with an increase in aggregate demand, only an increase in prices occurs without an increase in the scale of aggregate supply. There is inflation without economic growth.
The most important non-price factors of aggregate supply:
1. Changes in resource prices. With an increase in prices for resources - wages, interest rates, the cost of raw materials and equipment, rent, etc. - production costs increase. At the same time, the profits of firms decrease, production becomes unprofitable, and incentives to maintain the scale of production at the same level are reduced. As a result, aggregate supply begins to decline.
2. Performance change. Labor productivity is the most important factor influencing production costs, and therefore the amount of aggregate supply. An increase in labor productivity occurs as a result of higher qualifications of workers, better organization of production, the introduction of new technology, and better use of existing means of production. As labor productivity increases, production costs are reduced, which leads to increased profits for enterprises and increased incentives to expand the scale of production. Ultimately, aggregate supply increases under the influence of rising labor productivity. This is represented on the graph as a shift of the aggregate supply curve to the right.
3. Changes in legal regulations
occurs when taxes change, the directions and scale of government regulation of the economy change. Thus, subsidies to the private sector reduce production costs. This leads to increased profits and expanded production scale. As a result, the quantity of aggregate supply increases and the aggregate supply curve shifts to the right.
Graphically, the impact of non-price factors on aggregate supply is depicted by a shift of the aggregate supply curve to the left or right (Fig. 3).
Fig.3. Dynamics of aggregate supply under the influence of non-price factors
AGGREGATE SUPPLY (AS) is the total quantity of final goods and services that can be supplied (produced) in the economy at different price levels.
The dependence of the supply volume on the average price level in the country is called the AS CURVE.
The nature of the AS curve is influenced by:
a) price factors;
b) non-price factors. The former change the volume of aggregate supply (moving along curve A8). The second (changes in technology, resource prices, volume of resources used, taxation of firms, market structure, etc.) lead to a shift of the AS curve.
The AS curve can be static and dynamic.
Unlike the static one, the dynamic AS curve is used to assess the impact of inflation rates on changes in national output.
The shape of the AS curve is interpreted differently by classicists and Keynesians. Thus, changes in the value of aggregate supply under the influence of the same factor may be different, depending on what period (short or long) is taken into account.
The classical model looks at the economy in the long run.
Long term is the period during which resource prices have time to adjust to commodity prices so that the economy maintains full employment.
The long-term AS curve reflects the country's production capabilities and is constructed based on the following conditions:
a) the volume of production is determined only by the number of factors of production and available technology and is not determined by the price level;
b) changes in factors of production and technology are carried out slowly;
c) the economy operates at full employment of production factors and, therefore, the volume of production is equal to potential;
d) prices and nominal wages are flexible, changes maintain equilibrium in markets.
Under these conditions The AS curve is vertical. It characterizes the natural (potential) level of production volume (Figure 12), i.e., the volume of production under conditions of full employment, in which the resources of the economy are fully used, and unemployment is at the natural level.
Figure 12 – Long-run aggregate supply curve
Fluctuations in aggregate demand change the price level. For example, when the supply of money decreases, the AD 1 curve shifts to the left to the position. Economic equilibrium moves from point E1 to point E 2, but the amount of production AS remains at the same level.
Shifts in the aggregate supply curve in the long run are possible only when the value of production factors and technology changes.
In the short term, such a model is unacceptable. Keynesian model describes the economy in the short term and is based on the following premises:
a) underemployment in the economy;
b) commodity prices and nominal wages are rigid.
Under these conditions, the aggregate supply curve is horizontal. Fluctuations in aggregate demand affect production volume; the price level does not change. Modern concepts explain the difference between the short-term AS curve and the long-term curve by market imperfection, i.e., price inflexibility and imperfect information.
The short-run aggregate supply curve has three segments:
– horizontal (Keynesian) – I;
– intermediate (ascending) – II;
– vertical (classical) – III.
All three sections of the aggregate supply curve are presented in Figure 13.
Figure 13 – Sections of the short-term aggregate supply curve
The intersection of the AD and AS curves determines the equilibrium price level and the equilibrium volume of national production (Figure 14).
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Figure 14 – Equilibrium in the goods market
3 Keynesian model of macroeconomic equilibrium. Changes in balance
Macroeconomic equilibrium is the achievement of an equilibrium state in the economy in which aggregate demand is equal to aggregate supply. D. Keynes proved that macroeconomic equilibrium is compatible with unemployment, inflation and a fall in output.
In the Keynesian model, the study of macroeconomic equilibrium involves constructing a consumption function in the following axes: income is plotted on the x-axis, and total consumption expenditures are plotted on the y-axis.
The bisector dividing the angle in half means equality of income and consumption expenditures. The theoretical structure shown in Figure 15 is called the “Keynes cross”.
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Figure 15 – “Keynes Cross”
The intersection of the bisector and the curve CC 1 at point B means that all income is consumed. To the left of point B are negative savings (living on debt), since consumption costs exceed income, to the right are positive savings.
If aggregate expenditures include not only personal consumer expenditures of the population, but also investments of entrepreneurs, government purchases, and expenditures on net exports, then the line of the consumption function will coincide with the aggregate demand curve AD. In turn, the line of aggregate supply AS can be represented by a right angle bisector, since every increase in income is the result of an increase in production volume. Thus, the “Keynes cross” is a specification of the AD-AS model.
To the left of the macroeconomic equilibrium point, aggregate demand exceeds aggregate supply, and production volume is less than equilibrium. Increased demand is met by unplanned reductions in firms' inventories, which creates the conditions for increased employment and output. Thus, this is an inflation zone.
To the right of the point of macroeconomic equilibrium, the volume of production exceeds the equilibrium value. This means that buyers buy less goods than firms produce. Unsold products take the form of increasing inventories. Therefore, this is an unemployment zone.
A change in any component of aggregate spending causes a shift in the aggregate demand curve. If the AD curve shifts upward, there is an inflationary gap; downward, there is a deflationary gap.
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Figure 15 – Inflationary and deflationary gaps
Inflation gap– the amount by which aggregate demand (aggregate spending) must decrease in order to reduce equilibrium GNP to the non-inflationary full employment level.
Deflationary (recessionary) gap is the amount by which the aggregate expenditure curve falls below the point of macroeconomic equilibrium achieved under conditions of full employment.
The size of the inflation gap is determined by the formula:
where IR is the value of the inflation gap;
ΔY – amount of increase in income (Y 2 – Y 1)
μ – autonomous expenditure multiplier.
The size of the recession gap is calculated similarly, only with a plus sign.
Aggregate supply (AS) is the total quantity of final goods and services that can be supplied to the economy at different price levels. The concept is often used synonymously with gross national product.
Let us first dwell on the simplest graphical interpretation of the aggregate supply curve AS, which reflects changes in the real volume of production, or output, in connection with changes in the general price level.
The positive slope of the AS curve is associated in economic theory with the effect of production costs. The AS configuration reflects rising unit costs as GDP increases. At low GDP levels, when the economy is far from full employment, the pressure of production costs on prices is not so great. But as we approach the level of potential GDP, there are fewer and fewer unemployed resources, therefore, with the attraction of additional factors of production, the costs of paying for them increase. These costs represent increasing costs of production and therefore must be offset by rising price levels.
Aggregate supply is a model, represented in the figure as a curve, which shows the level of cash real exchange of production at each possible price level. Higher price levels create incentives to produce more goods and offer them for sale. Lower price levels cause a reduction in the production of goods.
There is great disagreement about nature and firm aggregate supply curve.
The curve consists of three defined segments:
1 – intermediate (deviating upward);
2 – Keynesian (horizontal);
3 – classic (vertical).
The shape of the aggregate supply curve reflects changes in unit costs can be calculated by dividing the cost of total inputs used by the volume of output. In other words, the cost per unit of output at a given level of output is the average cost for a given volume of output.
Intermediate (ascending) segment. Between Q and Qf, an increase in real national output is accompanied by an increase in the price level. Reasons: first, the entire economy practically consists of countless markets for goods and resources, and full employment occurs unevenly and not simultaneously in all sectors or industries; second, some industries may experience shortages and other production bottlenecks; Third, expanding production also means that when production reaches full capacity, some firms will have to use older, less efficient equipment. As production increases, less skilled workers are hired. For all these reasons, unit costs increase and firms must charge higher prices for goods in order to produce profitably. Therefore, the intermediate period is accompanied by rising prices.
Keynesian segment. In the graph, Qf denotes the potential level of real national output at full employment. Let us remember that the natural rate of unemployment arises from the volume of the national product. Full employment does not mean absolutely no unemployment. Economists consider frictional (associated with searching for or waiting for work) and structural (over time, important changes in the structure of consumer demand and technology occur, which in turn change the structure of overall labor demand) unemployment are completely inevitable. Therefore, the unemployment rate or the natural rate of unemployment at full employment is equal to the sum of the frictional and structural unemployment rates.
Note that the horizontal segment of the aggregate supply curve includes real national output, which is significantly less than national output at full employment. Consequently, the horizontal segment indicates that the economy is in a state of deep recession, depression and that a large number of machines, equipment, and labor are not used. These untapped resources can be put into action without putting any pressure on the price level. Workers who have been unemployed for two to three months are unlikely to expect an increase in wages when they return to their jobs. Since producers can purchase resources at fixed prices, production costs do not increase during expansion, and therefore there will be no reason for the prices of goods to rise. And vice versa, if the real volume decreases, then prices for goods and resources will remain at the same level. According to Keynesians, once full employment is reached, the aggregate supply curve becomes vertical at point Qf.
Classic (vertical) segment. At point Qf, the economy is at a point on its production possibilities curve where it is impossible to achieve further growth in production in the short term. This means that any further increase in prices will not lead to an increase in real volume, since the economy is already running at full capacity. At full employment, individual firms may try to expand production by bidding higher prices on inputs than other firms. but the resources and additional volume of product that one firm will receive will be lost by the other. As a result, the prices of resources and ultimately goods increase, but real output remains unchanged.
It should be noted that, firstly, this segment considers classical economic theory, in accordance with the conclusions of which, due to certain forces inherent in a market economy, complete dependence becomes the norm. secondly, “full employment”, “the real volume of national output at full employment” are not unambiguous concepts, since the working day and the size of the labor force can sometimes increase beyond normal limits.
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