Just as there are fluctuations in supply and demand in individual markets, supply and demand at the level of the national economy, i.e. aggregate demand and aggregate supply are also subject to fluctuations and may be in an equilibrium or nonequilibrium state.

Aggregate offer - it is the sum of the prices of all goods and services offered for sale, or the actual volume of production at each possible price level.

Aggregate demand - these are the needs presented on the market in monetary form by the population, the state, enterprises and foreign countries, i.e. it is the volume of goods and services that consumers, businesses, and governments plan to buy at each possible price level.

Aggregate demand and aggregate supply are determined respectively by the sum of individual demands and supply.

Principles of constructing curves of aggregate demand AD and aggregate supplyASthe same as demand and supply curves at the micro level.

The aggregate demand curve AD shows that at a certain point in time for any price level there is a quantity of goods and services for which aggregate demand is presented (Fig. 1).

Fig.1. Aggregate demand curve

Aggregate demand is influenced by both price and non-price factors (Fig. 2.).

Rice. 2. Factors influencing aggregate demand

Interest rate effect is that as the general price level rises, interest rates also rise. Most investment goods, like durable goods, are purchased through borrowed funds. An increase in the general price level leads to an increase in demand for credit resources, an increase in interest rates, and a reduction in demand for goods from the population and entrepreneurs. A low price level affects the reduction of interest rates and thereby stimulates the growth of consumption and investment, and consequently aggregate demand.

Wealth effect manifests itself in changes in the real value and purchasing power of financial assets and household income. Thus, lower prices will contribute to the growth of real incomes and the growth of aggregate demand; inflation, on the contrary, will reduce the purchasing power of the population and aggregate demand.

Effect of import purchases occurs when prices for domestic and foreign goods change. If the prices of goods within a country rise, then exporting them becomes difficult and expensive. At the same time, the demand for cheaper imported goods is increasing. As a result, net exports will decrease, and hence aggregate demand. An increase in exports and a decrease in imports will contribute to the growth of aggregate demand.

Conclusion: a change in all these factors leads to a change in aggregate demand and a shift in its curve: down to the left when it decreases and up to the right when demand increases.

Aggregate supply curve A S shows relationship between real production volume and price level. At the same time, there is a direct relationship: the higher the price level, the greater the interest in additional production of goods and services(Fig. 3.).

Rice. 3. Aggregate supply curve

Factors influencing aggregate supply are somehow related to production costs. Among them the following can be distinguished (Fig. 4.).

Under the influence of these non-price factors, changes in production costs per unit of output occur at a given price level for these products, aggregate supply changes and its AS curve shifts: upward to the right with a decrease in costs per unit of output and an increase in aggregate supply, and down to the left with an increase in costs per unit of output and a decrease in aggregate supply.

Rice. 4. Factors influencing aggregate supply

Aggregate demand and factors determining it

Aggregate supply and its factors

Macroeconomic equilibrium between real output and price level

Questions for independent work

Tests

Tasks and problem situations

Literature

8.1. Aggregate demand and factors determining it

Aggregate demand. Aggregate demand curve. The process of combining individual prices for goods into a total price (price level), reducing the equilibrium quantity of individual goods into the real volume of national production is called ahregistration. If the essence of aggregation is understood, it becomes possible to move on to the analysis of aggregate demand and aggregate supply, because the curves of these concepts can be constructed only on the basis of clarifying the relationship between the aggregate price (price level) and the real volume of national production, which are plotted respectively on the ordinate and abscissa axes.

Aggregate demand- this is the need for goods and services on the part of the population, enterprises, the state and foreign countries, presented in monetary form. It represents an abstract model of the relationship between the price level and the real volume of national production. The general characteristic of this model is that the lower the price level for goods, the larger part of the real volume of national production buyers will be able to purchase. Conversely, a higher price level is accompanied by a fall in the possible volume of sales of the national product. Consequently, there is an inverse relationship between the price level and the real volume of national production. It is most clearly expressed through the aggregate demand curve (Fig. 8.1).

Rice. 8.1. Aggregate demand curve

Descending curve shape AD shows that at a lower price level, a larger volume of national product will be sold.

Total price factorsdemand. The price factors of aggregate demand include, first of all, the effect of the interest rate, the effect of material assets, or

ABOUT ~X real cash balances, and the effect

import purchases.

Interest rate effect influences the nature of the movement of the aggregate demand curve in such a way that, on the one hand, consumer spending and, on the other, investment depend on its level, i.e. As the price level rises, interest rates rise, and rising interest rates are accompanied by a decline in consumer spending and investment. The fact is that an increase in the price level expands the demand for cash. Consumers need additional funds to make purchases, entrepreneurs need additional funds to purchase raw materials, equipment, pay wages, etc. If the volume of money supply does not change, the price for using money increases, i.e. interest rate, and this limits expenses on both purchases and investments. It follows that an increase in the price level for goods increases the demand for money, raises the interest rate and thereby reduces the demand for the real volume of the national product produced.

Wealth effect (wealth effect) also increases the downward trajectory of the aggregate demand curve. This is due to the fact that as prices rise, the purchasing power of financial assets such as fixed-term accounts and bonds decreases, real incomes of the population fall, and therefore the purchasing power of families decreases. If prices fall, purchasing power increases and expenses increase.

Effect of import purchases expressed in the ratio of national prices and prices on the international market. If prices on the national market increase, buyers buy more imported goods, and sales of domestic goods on the international market decrease, i.e. the effect of import purchases leads to a decrease in aggregate demand for domestic goods and services. A decrease in prices for goods strengthens the export capabilities of the economy and increases the share of exports in the aggregate demand of the population.

Non-price factors of aggregate demand. These include changes in consumer, investment and government spending, and in spending on net exports. The effect of non-price factors is also accompanied by changes V aggregate demand. If it contributes to an increase in aggregate demand, then the curve from the line ADj shifts to AB 2 ; if non-price factors limit aggregate demand, the curve shifts to the left to AD 3 (Fig. 8.2).

Changes in consumer spendingduh can influence aggregate demand under the influence of various motives. Let us give a clear example with the purchase of imported goods. Previously, a version of the action of price factors was given, in which a change in the price level in the foreign and domestic markets leads to a change in aggregate demand in one direction or another.

Rice. 8.2. Changes side. However, such changes in pro-Soviet demand also occur at constant prices: it turns out, for example, that Austrian shoes that appeared on the Italian market are of high quality and the demand for these products at equal prices will go up. There are many such options for the action of non-price factors, but they are classified according to individual characteristics, and then within the same consumer expenditures we can identify factors that affect aggregate demand, such as consumer welfare, consumer debt and taxes.

If we turn to the factor of consumer welfare, we can see that it depends on the state of affairs in the field of financial assets (stocks, bonds) and the situation with real estate (land, buildings). Thus, an increase in stock prices at a constant price level on the market will lead to an increase in welfare and aggregate demand will increase. At the same time, falling land prices will reduce welfare and reduce aggregate demand.

Examples can also be given with consumer expectations. If consumers expect their incomes to increase in the near future, they will now begin to spend significantly more of their income, which will shift the aggregate demand curve to the right. In the reverse perspective, purchasing actions will be limited and the aggregate demand curve will shift to the left. A shift in aggregate demand in the event of impending inflation is very sensitive. Each buyer strives to make a purchase before the price increase, but will delay it in the first days after the increase.

The size of aggregate demand is also affected by consumer debt. If a person purchased a large item on credit, then for a certain time he will limit himself in other purchases in order to quickly pay off the required amount. But once you pay off the debt, the demand for purchases quickly increases.

There is a direct connection between the amount of income tax and aggregate demand. The tax reduces family income, so its increase reduces aggregate demand, and its decrease expands the latter.

Changes in investments also affect aggregate demand. If enterprises acquire additional funds in order to expand production, the aggregate demand curve will go to the right, and if the trend is reversed, it will go to the left. Interest rates, expected returns on investments, corporate taxes, technology, and excess capacity can all operate and be influenced here.

When we talk about the interest rate, we do not mean its shift up or down (this was taken into account in price factors), but movement under the influence of changes in the money supply in the country. An increase in the money supply reduces the interest rate and increases investment, while a decrease in the money supply increases the interest rate and limits investment. Expected profits increase the demand for investment goods, while business taxes reduce the demand for investable goods. New technologies stimulate investment processes and expand aggregate demand, and the presence of excess capacity, on the contrary, restrains the demand for new investment goods.

Government spending affect aggregate demand due to the fact that, with constant tax collections and interest rates, government purchases of the national product expand, thereby increasing the consumption of commodity values.

Aggregate demand is also related to expenses for exporting goods. The principle here is this: the more goods enter the world market, the wider the aggregate demand. The fact is that the increase in national incomes of other countries allows them to expand the purchase of imported goods and products, which expands the demand for goods in those countries from which goods are imported. Therefore, for developed countries, foreign trade is beneficial with both developing and developed countries. In the first case, they have the opportunity to sell products that are not in demand in civilized markets; in the second, on the contrary, they can cover the requests of other states for modern goods and services.

Aggregate demand (AD – aggregate demand) is the sum of all types of demand or the total demand for all final products and services produced in society.

The structure of aggregate demand includes:

Demand for consumer goods and services (C);
demand for investment goods (I);
demand for goods and services from the state (G);
net exports – the difference between exports and imports (X).

Thus, aggregate demand can be expressed by the formula:

AD = C + I + G + X.

The aggregate demand curve shows the quantity of goods and services that consumers are willing to purchase at each possible price level. Movement along the AD curve reflects changes in aggregate demand depending on price dynamics. Demand at the macro level follows the same pattern as at the micro level: it will fall when prices rise and increase when they fall.

This dependence follows from the equation of the quantity theory of money:

MV = PY and Y=MV/P, where P is the price level in the economy;
Y is the real volume of output for which there is demand; M is the amount of money in circulation;
V – velocity of money circulation.

From this formula it follows that the higher the price level P, the less (subject to fixed M and the speed of their circulation V) the quantity of goods and services for which Y is in demand.

The inverse relationship between the amount of aggregate demand and the price level is associated with:

The interest rate effect (Keynes effect) - as prices rise, the demand for money increases. With a constant supply of money, the interest rate increases, and as a result, demand from economic agents using loans decreases, and aggregate demand decreases;
the wealth effect (Pigou effect) - rising prices reduce the real purchasing power of accumulated financial assets, making their owners poorer, resulting in a decrease in the volume of import purchases, consumption and aggregate demand;
the effect of import purchases - an increase in prices within the country with constant import prices shifts part of the demand to imported goods, as a result of which exports decrease and aggregate demand in the country decreases.

Along with price factors, aggregate demand is influenced by non-price factors. Their action leads to a shift of the AD curve to the right or left.

Non-price factors of aggregate demand include:

The supply of money M and the velocity of its circulation V (which follows from the equation of the quantity theory of money);
factors influencing household consumer spending: consumer welfare, taxes, expectations;
factors affecting the investment costs of firms: interest rates, preferential lending, opportunities for obtaining subsidies;
government policies that determine government spending;
conditions in foreign markets affecting net exports: fluctuations in exchange rates, prices on the world market.

Changes in aggregate demand are shown in Fig. 9.1. A shift of the straight line AD to the right reflects an increase in aggregate demand, and a shift to the left reflects a decrease.

Aggregate supply (AS – aggregate supply) – all final products (in value terms) produced (offered) in society.

The aggregate supply curve shows the relationship between total supply and the general price level in the economy.

The nature of the AS curve is also influenced by price and non-price factors. As with the AD curve, price factors change the quantity of aggregate supply and cause movement along the AS curve. Non-price factors cause the curve to shift to the left or right. Non-price supply factors include changes in technology, resource prices and volumes, taxation of firms and the structure of the economy. Thus, an increase in energy prices will lead to an increase in costs and a decrease in supply (the AS curve shifts to the left). A high harvest means an increase in aggregate supply (a shift of the curve to the right). An increase or decrease in taxes respectively causes a decrease or increase in aggregate supply.

The shape of the supply curve is interpreted differently in classical and Keynesian schools of economics. In the classical model, the economy is considered in the long term. This is a period during which nominal values ​​(prices, nominal, nominal interest rates) change quite strongly under the influence of market fluctuations and are flexible. Real values ​​(volume of output, level of employment, real interest rate) change slowly and are taken as constant. The economy operates at full capacity with full employment of the means of production and labor resources.

The aggregate supply curve AS appears as a vertical line, reflecting the fact that under these conditions it is impossible to achieve further increases in output, even if this is stimulated by an increase in aggregate demand. Its growth in this case causes inflation, but not an increase in GNP or employment. The classic A S curve characterizes the natural (potential) volume of production (GNP), i.e. the level of GNP at the natural level or the highest level of GNP that can be created with the technologies, labor and natural resources available in society without increasing the rate of inflation.

The aggregate supply curve can move left and right depending on the development of production potential, productivity, production technology, i.e. those factors that influence the movement of the natural level of GNP.

The Keynesian model looks at the economy in the short term. This is a period (lasting from one to three years) that is necessary to equalize prices for final products and. During this period, entrepreneurs can make a profit as a result of excess prices for final products while prices for factors of production, primarily labor, lag behind. In the short term, nominal values ​​(prices, nominal wages, nominal interest rates) are considered rigid. Real values ​​(output volume, employment level) are flexible. This model assumes an underemployed economy. Under such conditions, the aggregate supply curve AS is either horizontal or upward sloping. The horizontal line segment reflects the state of deep recession in the economy, underutilization of production and labor resources. The expansion of production in such a situation is not accompanied by an increase in prices for resources and. The upward segment of the aggregate supply curve reflects a situation where an increase in national output is accompanied by a slight increase in prices. This may occur due to the uneven development of individual industries, the use of less efficient resources to expand production, which increases the level of costs and prices for final products in conditions of their growth.

Both classical and Keynesian concepts describe reproductive situations that are quite possible in reality. Therefore, it is customary to combine the three forms of the supply curve into one line, which has three segments: Keynesian (horizontal), intermediate (ascending) and classical (vertical). (Fig.9.2)

The intersection of the aggregate demand curves AD and aggregate supply AS gives the point of general economic equilibrium. The conditions of this equilibrium will be different depending on the segment on which the aggregate supply curve AS intersects with the aggregate demand curve AD.

The intersection of the AD curve and the AS curve in the short term means that the economy is in short-term equilibrium, in which the price level for final products and the real national product are established on the basis of equality of aggregate demand and aggregate supply. (Fig.9.3) Equilibrium in this case is achieved as a result of constant fluctuations in supply and demand. If demand AD exceeds supply AS, then to achieve an equilibrium state it is necessary either to increase prices at constant production volumes or to expand production output. If supply AS exceeds demand AD, then production should either be reduced or prices should be lowered.

The state of the economy that occurs at the intersection of three curves: the aggregate demand curve (AD), the short-run aggregate supply curve (AS), and the long-run aggregate supply curve (LAS) is the long-run equilibrium. On chart 9.4. this is point E 0.

Long-term equilibrium is characterized by:

Prices for factors of production are equal to prices for final products and services, as evidenced by the intersection at point E 0 of the short-term aggregate supply curve AS 1 and the long-term supply curve LAS.
Total planned expenditures are equal to the natural level of actual production. This is evidenced by the intersection of the aggregate demand curve AD 1 and the long-term aggregate supply curve LAS.
Aggregate demand is equal to aggregate supply, which follows from the intersection at point E 0 of the aggregate demand curves AD 1 and the short-term aggregate supply curve AS 1.

Let us assume that as a result of the action of some non-price factor (for example, an increase in the supply of money by the Central Bank), there was an increase in aggregate demand, and the aggregate demand curve shifted from position AD 1 to position AD 2. This means that prices will be set at a higher level , and will be in a state of short-term equilibrium at point E 1. At this point, the real output of the product will exceed the natural (potential), prices will rise, and unemployment will be below the natural level. As a result, the expected level of prices for resources will increase, which will cause an increase in costs and a decrease in aggregate supply from AS 1 to AS 2, and, accordingly, a shift of the AS 1 curve to the AS 2 position. At the intersection point E 2 of the AS 2 and AD 2 curves, the equilibrium, but it will be short-term, since the prices of factors of production do not coincide with the prices of final products. A further increase in prices for production factors will lead the economy to point E3. The state of the economy at this point is characterized by a reduction in product output to the natural level and an increase in unemployment (also to its natural level). The economic system will return to its original state (long-term equilibrium), but at a higher price level.

The problem associated with the shape of the aggregate supply curve and its setting is not only theoretical, but also of important practical importance. The question being addressed is whether the market system is self-regulating, or whether aggregate demand should be stimulated to achieve equilibrium.

From the classical (neoclassical) model it follows that due to the flexibility of the nominal wage rate and interest rate, the market mechanism automatically constantly directs the economy towards a state of general economic equilibrium and full employment. An imbalance (unemployment or production crisis) is possible only as a temporary phenomenon associated with a deviation of prices from their equilibrium values. Shifts in the aggregate supply curve A S are possible only with a change in technology or the value of the factors of production used. In the absence of such changes, the AS curve in the long run is fixed at the level of the potential product, and fluctuations in aggregate demand are reflected only in the price level. Changes in the amount of money in circulation affect only the nominal parameters of the economy, without affecting their real values. It follows from this that there is no need to interfere with the operation of the economic mechanism.

In Keynesian theory, the main provisions of neoclassical theory were criticized. In contrast to the neoclassical theory, which considers an economy corresponding to the conditions of perfect competition, Keynesians point out the presence of many imperfections in the market mechanism. These are the presence of monopolies in the economy, the uncertainty of the values ​​of economic parameters that determine the decisions of economic entities, administrative regulation of prices, etc. Salaries, prices, interest rates are not as flexible as neoclassical theory represents.

Keynes proceeded from the fact that the level of wages is fixed by labor legislation and labor contracts and is therefore unchanged. Under these conditions, a decrease in aggregate demand will lead to a decrease in production volume and a reduction in the demand for labor, i.e. rising unemployment. (Fig. 9.5.) Since wages do not change, there is no reduction in production costs and reduction in prices. The segment of the aggregate supply curve is horizontal at the price level P 1. (Figure 9.6.) Point Q 1 in this figure shows the output corresponding to full employment. After this point the supply curve is vertical. This means that with an increase in aggregate demand, production volume cannot increase (due to the depletion of resources), but prices will increase. Within the limits of available resources (on the horizontal section of the AS curve), the economy can reach equilibrium at any point on this segment, but the volume of national output will be lower than at full employment. From this, Keynesians conclude that it is necessary for the state to maintain aggregate millet (and, consequently, production and employment) at the desired level.

W – wages; L – employment;
Q 1 – production volume corresponding to full employment; L 1 – labor supply corresponding to full employment; Р3 inflationary rise in prices with an increase in aggregate demand;
(L 2 – L 1) – unemployment;
Q 2 – production volume with decreased aggregate demand.

Aggregate demand growth

Having abandoned some of the basic postulates of neoclassics, for example, the analysis of the market as a self-regulating mechanism, J. Keynes proved that the market can provide effective demand without government regulation of monetary and budget policies. government in this area is aimed at encouraging private investment and the growth of consumer spending in order to increase.

Rice. 6. Aggregate supply models

In accordance with the Keynesian version, the AD-AS model looks different than the classical one (Fig. 6). Moreover, when analyzing the model, J. Keynes identified the situation of an inflationary gap and the situation of a recessionary gap. Inflationary gap situation. With it, the growth of aggregate demand (a shift to the right and upward of the AD curve) leads in the short term to an increase in production above the potential level. The long-term consequence of an increase in aggregate demand will be an increase in prices while a return to potential output. The inflationary gap between potential and real equilibrium outputs is Y=Y-Y>0 Y is the stable (potential) volume of real GDP production with available resources, Y is the real equilibrium output. Recession gap situation. A decrease in aggregate demand (a downward shift to the left of the AD curve) in the short term leads to a decrease in the level of real production compared to potential. The long-term consequence of increased demand in this case is not a decrease in prices while returning to potential production volume, but stagnation, recession, since prices have one-sided flexibility: they rise relatively easily, but fall extremely slowly. The recessionary gap between potential and real equilibrium outputs in this case is Y=Y-Y Aggregate demand model The “aggregate demand - aggregate supply” (“AD - AS”) model shows the relationship (like any model, ceteris paribus) between the price level (expressed , for example, through the GNP deflator) and the real national (domestic) product (gross or net), which is bought and sold.

Aggregate demand (AD) is the volume of goods and demand for services produced in a given region that all consumers are willing to buy, depending on the price level. The aggregate demand curve - AD 1 has a descending shape (Fig. 12-1), which means an inverse relationship between the price level and the volume of aggregate demand for national goods and services. Thus, if there is inflation in the economy, then it reduces the amount of aggregate demand for national goods and services. This relationship is similar to the law of demand. But the factors that explained the desires and capabilities of consumers in the market for a particular product do not explain the behavior of the AD curve.

Firstly, it is impossible to achieve complete satisfaction of the needs for all goods and services that make up the national product: some will always be in acute shortage anyway. Secondly, on a macroeconomic scale, most consumers are at the same time suppliers of resources, and the increase in their expenses as buyers due to rising prices simultaneously means a proportional increase in their income as sellers. The negative slope of AD is explained by several factors. On the one hand, inflation reduces the real value of those financial assets of households that have a fixed nominal value (cash, deposits, bonds, bills, etc.) and encourages them to compensate for losses by spending less on purchases of goods and services: this is the wealth effect . Another factor that determines the shape of the AD curve, the interest rate effect, is associated with an increase in the interest rate during inflation (with a constant money supply), which reduces both private investment and consumer spending using credit funds. Finally, there is the net export effect: an increase in the price of national goods reduces the volume of foreign demand for them and at the same time increases the demand for imported goods. In the Russian economy, in conditions of extremely high inflation, a fading investment process, and the underdevelopment of reliable savings and lending instruments, the first two effects seem to hardly manifest themselves. In addition, inflation expectations, especially with high rates of price growth, stimulate excessive demand, which leads to an increase in current household consumption. Therefore, aggregate demand is relatively inelastic.

Change In reality, aggregate aggregate demand rarely remains stable demand for long. It consists of the total demand for national goods and services from the four large groups of consumers in the macroeconomy: households, private firms, government agencies and foreigners. Any significant changes in the needs and capabilities of any of these groups will affect aggregate demand, causing it to increase or decrease. Monetarist economists believe that the main reason for the instability of aggregate demand is an excess or shortage of the money supply in circulation.

The growth of aggregate demand looks on the graph as a shift of the AD curve to the right and upward (from AD 1 to AD 2). This means that now all consumers taken together are willing to buy more of the national product at the same price level or the same volume of the national product at higher prices.

Accordingly, a decrease in aggregate demand appears on the graph as a shift of the AD curve to the left and down (from AD1 to AD3). The main difficulty in determining and forecasting aggregate demand is associated with the extreme diversity of interests and intentions of numerous groups of consumers who are under the simultaneous influence of many factors of varying strength and nature, often acting in opposite directions. For example, an increase in taxes on personal income and corporate income will cause a reduction in consumer spending and private investment, which will push the AD curve down to the left; but the funds received from additional taxes will partially return to the population in the form of transfer payments and payments for resources, increasing consumption, and will be partially spent by the state on the purchase of national goods and services - all this will push the AD curve upward to the right. The final outcome regarding aggregate demand is quite uncertain.

Level of aggregate demand

The aggregate demand curve deviates down and to the right, i.e. just like the demand curve for an individual good. The reasons for this deviation are various. The former explanation is related to income and substitution effects: when the price of an individual good falls, the consumer's (constant) money income enables him to purchase more of the good (income effect). Moreover, when the price falls, the consumer is willing to purchase more of a given good because it becomes relatively cheaper than other goods (substitution effect). But these explanations are not enough when we are dealing with aggregates.

The nature of the aggregate demand curve is determined primarily by three factors:

1) the effect of interest rates;
2) the effect of wealth, or real cash balances;
3) the effect of import purchases.

The interest rate effect suggests that the path of the aggregate demand curve is determined by the effect of a changing price level on the interest rate, and hence on consumer spending and investment. When the price level rises, interest rates rise, and increased interest rates, in turn, lead to a reduction in consumer spending and investment.

When interest rates are high, businesses and households cut back on a certain amount of spending, i.e. respond quickly to interest rate changes. A firm that expects to earn a 10% return on investment goods purchased will consider the purchase profitable if the interest rate is, for example, 7%. But the purchase will not pay and therefore will not take place if the interest rate increases, say, to 12%. Due to rising interest rates, consumers will also decide not to buy houses or cars.

So:

1) an increase in interest rates leads to a reduction in some expenses of enterprises and consumers;
2) a higher price level, increasing the demand for money and raising the interest rate, causes a reduction in demand for the real volume of the national product.

The wealth effect, or real cash balance effect, suggests that at higher price levels the real value, or purchasing power, of accumulated financial assets, particularly assets with a fixed monetary value, such as time accounts or bonds, held by the public will decrease. In this case, the population will actually become poorer, and therefore we can expect them to reduce their spending. And, conversely, when the price level decreases, the real value, or purchasing power, of material assets will increase and expenses will increase.

The effect of import purchases leads to a decrease in aggregate demand for domestic goods and services as the price level rises. Conversely, a comparative decrease in the price level contributes to a reduction in imports and an increase in exports and thereby increases the net volume of exports in aggregate demand.

Non-price factors of aggregate demand

Changes in the price level lead to the following changes in the real volume of national production: an increase in the price level, other things being equal, will lead to a decrease in demand for real output, and vice versa, a decrease in the price level will cause an increase in production volume. However, if one or more of the “other conditions” changes, the entire aggregate demand curve shifts. These “other conditions” are called non-price factors of aggregate demand.

To understand what leads to changes in the volume of national output, it is necessary to distinguish changes in the volume of demand for a national product, caused by changes in the price level, from changes in aggregate demand, caused by changes in one or more non-price determinants of aggregate demand.

Non-price factors of aggregate demand that shift the aggregate demand curve include:

Change in consumer spending:

A) consumer welfare,
b) consumer expectations,
c) consumer debt,
d) taxes.

Changes in investment costs:

A) interest rates
b) expected returns on investment

Aggregate Demand Equilibrium

The intersection of aggregate demand and supply curves within the same plane makes it possible to observe the state of general macroeconomic equilibrium. In economic terms, macroeconomic equilibrium is the equilibrium of the economy and its market mechanism, when the demand for factors, finished products, labor, securities, etc. is approximately equal to their supply coming from other economic entities, depending on who owns and uses them. Accordingly, the point of intersection of supply and demand, on the one hand, shows the equilibrium volume of output, and on the other, the equilibrium price level that suits both buyers and sellers.

Macroeconomic balance can be disrupted or changed. For example, the economy was initially at near full employment. Let's assume that the supply of money in the country has increased, which makes economic entities more solvent. As a result, the demand for various goods, services and other benefits begins to grow. The aggregate demand curve moves along the supply curve, and short-term equilibrium is established. An increase in demand stimulates the development of production and its volumes. Initially, the price of the product does not change, but as marginal costs rise, the manufacturer decides to set a higher price level. Consumer demand decreases, which characterizes the return of the economy to the previous level of output, only at a higher price level.

Having considered the general macroeconomic equilibrium, it is necessary to turn to the equilibrium that can arise directly in the goods market, that is, the market for goods and services that consumers purchase to satisfy their needs. There are also two main models presented here: classical and Keynesian.

Classicists believe that the situation when the total expenditures of all economic entities (GDP = consumer expenditures + investment expenditures of firms + government expenditures + expenditures abroad on the purchase of goods of our production - our expenditures on the purchase of imported products) may not be enough to purchase all goods produced in conditions of full employment of resources is simply impossible. In other words, equilibrium is always established. In addition, even if we assume that the equilibrium may be disturbed, then in this case wages, the price level and interest rates will move and begin to rise. This will make it possible, in the event of declining demand, to reduce the amount of supply, i.e., ensure a production decline.

Keynesians, on the contrary, believe that there is no mechanism for self-regulation of equilibrium. At the same time, equilibrium itself does not coincide with full employment of resources, i.e., the equilibrium volume of production is always less than potential. This is mainly due to the lack of equality between savings and investments, since they are carried out by different economic entities with different goals and motives. For example, the motives of households to save more include the following: purchasing more expensive goods, providing for themselves in old age and children in the future, as well as insurance against unforeseen circumstances, both of an economic nature and other potential dangers. When deciding to invest, firms are primarily motivated by the desire to obtain the maximum possible profit and a relatively low real interest rate.

Non-price factors of aggregate demand

Expectation. This factor is generated by the usual psychology in the behavior of economic entities, according to which their current decisions must necessarily take into account those changes in the economic environment expected in the future. Expectations can influence the current behavior of both households and businesses.

Changes in consumer spending depend on the forecasts made by households. If households believe that their real income will increase in the future, they will be willing to spend a larger proportion of their current income. As a result, consumption expenditures increase and the aggregate demand curve shifts to the left. A similar impact on current aggregate demand is exerted by the massive expectation of a new wave of inflation, since in this case households will increase current purchases of consumer goods, outstripping price increases.

Changes in investment spending depend on the expectations of businesses. Thus, the emergence of optimistic forecasts regarding the receipt of high returns on invested capital may contribute to an increase in demand for investment goods, which will cause the aggregate demand curve to move to the right. If the prospects for high returns from future investment programs are unconvincing, then investment spending will decrease, which will cause a reduction in aggregate demand and a movement of its curve to the left.

Changes in the economic policy of the state. Considering the model of economic circulation, we noted that the government can also influence the amount of total spending. Thus, by increasing government purchases, which are one of the components of aggregate spending, the government increases aggregate demand and shifts the curve to the right. By raising personal income taxes, the government reduces household tax-free income, causing a decrease in consumer spending and aggregate demand, which shifts its curve to the left. By raising corporate income taxes, the government will cause the expected rate of net return on investment to decline. This will reduce the investment component of aggregate demand, which will shift its curve to the left.

An important element of the state’s economic policy is the monetary policy of the National Bank, changes in which also affect aggregate demand. Thus, the National Bank’s measures to increase the money supply in the economy increase aggregate demand and shift its curve to the right. The National Bank's measures to reduce the money supply reduce aggregate demand and shift its curve to the left.

Changes in the global economy. Since aggregate demand is affected by net exports, this means that changes in international trade also affect aggregate demand. These changes can occur in several directions.

The first is the growth of economic activity in our trading partners. In this case, trading partners' GDP increases, which causes an increase in their demand for our goods and an increase in our exports. This increases aggregate demand and shifts its curve to the right.

Another is a change in the price level of our trading partners. If their domestic prices rise, then our goods become relatively cheaper and more attractive to them, which increases our exports and aggregate demand, and its curve shifts to the right. Aggregate demand is similarly affected by changes in the exchange rate of our trading partners, which may be caused by changes in the situation on currency exchanges.

The third is changes in the trade policies of our partners. If in relations with our country they shift the emphasis in trade policy towards strengthening the role of protectionist mechanisms, then our exports fall. If preference is given to free trade mechanisms, then our exports increase. This affects net exports as a component of aggregate demand, which shifts its curve in the corresponding direction.

Shift in the Aggregate Demand Curve

When analyzing aggregate demand and aggregate supply, it is usually assumed that shifts in the aggregate demand and aggregate supply curves do not affect the natural level of output (which increases at a constant rate). In this case, fluctuations in aggregate output around level Y in the figure characterize changes in aggregate output in the short term (economic cycle). However, some economists challenge the assumption that shocks to aggregate demand and aggregate supply do not affect Yn.

A group of economists led by Edward Prescott at the University of Minnesota developed a theory of macroeconomic fluctuations called real business cycle theory. According to this theory, real supply shocks change the natural level of output (Y). In this theory, exogenous (shock-like) changes in preferences (for example, the desire of workers to work) and technology (productivity) are considered the main driving forces of cyclical fluctuations in the short term, since they cause significant fluctuations in Y in the short term. At the same time, shifts in the aggregate demand curve, caused, for example, by monetary policy measures, have little effect on fluctuations in the volume of aggregate output. According to real business cycle theory, most cyclical fluctuations occur as a result of fluctuations in the natural level of output, so there is little need to pursue active economic policies and eliminate high unemployment. The theory of the real business cycle is highly controversial and is currently the subject of intensive research.

Another group of economists disagrees that demand shocks do not affect the natural rate of output. They argue that the natural rate of unemployment and output are subject to hysteresis, that is, deviation from the level of full employment as a result of high unemployment in the past. When a decrease in aggregate demand, shifting the AD curve to the left, leads to an increase in unemployment, there is an increase in the natural rate of unemployment above the full employment level. This situation arises when the unemployed become desperate to find work or when they are reluctant to hire workers who have been unemployed for a long time, considering this fact to be evidence that such workers are not suitable for them. As a result, the natural rate of unemployment rises, which entails a fall in Yn below the full employment level. Next, the economy’s self-regulation mechanism comes into play, which can return it only to the natural level of unemployment and output, but not to the level of full employment. Now it is possible to reduce the natural rate of unemployment (and growth of Y) to the level of full employment only by implementing stimulating economic policies that shift the aggregate demand curve to the right and increase the volume of aggregate output. Thus, proponents of the concept of hysteresis are more likely to advocate expansionary policies as a means of quickly restoring full employment levels in the economy.

Aggregate demand and its factors

The aggregate demand curve is described by the same equation as GDP:

AD = C + I + G + Xn,
where C is the demand of households and individuals;
I – investment demand of firms;
G – government demand;
Xn – demand abroad;

Graphically, the aggregate demand curve looks similar to a regular demand curve, only the x-axis now stands for GDP (Y), and the y-axis now stands for the general price level in the country (P). It is also convex with respect to the origin of the coordinate system and is characterized by an inverse relationship between the magnitude of demand and the mechanism. If prices decrease, each of the subjects strives to satisfy their needs to the greatest extent, to purchase the maximum desired amount of goods, goods, and services. Thus, the demand curve shows how much economic goods consumers want and are willing to purchase at the prevailing price level in the economy.

There are two large groups of factors that, one way or another, have a huge impact on consumer aggregate demand.

Price factors, i.e. those that are inextricably linked with pricing dynamics.

1. The price of market goods and services is the starting point for the buyer’s choice. Any consumer always focuses on the system of relative prices and, with the same quality, will choose a cheaper product, and with the same price, a better one.
2. The wealth effect, or the Pigouvian effect. When the general price level rises, inflation inevitably occurs; the interest rate in these conditions falls, which reduces the amount of savings and assets. So, it turns out that when prices rise, the assets of the population decrease by a certain amount, and, as a consequence, aggregate demand also falls. Otherwise, as prices fall, aggregate demand increases. In other words, with a constant amount of income and a decreasing value of market goods, the purchasing power of the subject increases: for the same amount of money he can purchase a larger set of goods and services, and accordingly he feels somewhat richer.
3. Interest rate effect, or Keynes effect. Equality of savings and investment implies the coincidence of the desire of households to save with the desire of firms to make long-term capital investments. When prices and interest rates rise, investing in bank deposits turns out to be most effective, and the population decides to keep money. At the same time, it is not profitable for firms to invest at a high interest rate, since one way or another they take out some start-up capital on credit. It turns out that savings are growing and investments are declining. In general, an increase in the interest rate leads not only to an increase in savings, but also to a decrease in consumption by the same amount, which together reduces national income and aggregate demand. When interest rates fall, households spend more and firms invest more, so GDP rises in line with aggregate demand.
4. The effect of import purchases, or the Mundell-Fleming effect. If prices within a country begin to rise, the population partially stops consuming domestically produced products and gives preference to imported goods. This in turn causes a decrease in net exports, the share of consumption and aggregate demand. Otherwise, when prices fall, the amount of imported goods in the overall structure of market supply decreases, the consumption of domestic goods and services grows, and the demand for them increases.
Non-price factors. These typically include the availability and prices of substitute goods, economic and inflationary expectations of consumers, as well as fashion and taste preferences. Within macroeconomics, the main non-price factors are the volume of money supply, or money supply in the economy, and the velocity of its circulation. The more money is in the hands of the population, in circulation, the higher the purchasing power, as a result of which prices for goods and services begin to rise, which causes a reduction in overall demand.

Quantity of aggregate demand

Aggregate demand is subject to the general patterns of demand formation, which were discussed above, and therefore it can be depicted graphically as follows (Fig. 2).

Rice. 2. Country's aggregate demand curve

The aggregate demand curve shows that with an increase in the general price level, the amount of aggregate demand (the total amount of purchases of goods and services of all types in all markets of a given country) decreases in the same way as in the markets of individual ordinary (normal) goods.

But we know that if prices for individual goods rise, consumer demand simply switches to analogous goods, substitute goods, or other goods or services. At first glance, it is not clear how the overall demand for all goods and services can decrease, since there seems to be no switching of consumer spending here.

Of course, income does not disappear anywhere. The general patterns of consumer behavior are not violated in the aggregate demand model. They just appear here in a slightly special way.

If the general price level in a country rises significantly (for example, under the influence of high inflation), then buyers will begin to use part of their income for other purposes.

Instead of purchasing the same amount of goods and services produced by the national economy, they may choose to use some of their money to:

1) creation of savings in the form of cash and deposits in banks and other financial institutions;
2) purchasing goods and services in the future (i.e., they will begin to save money for specific purchases, and not in general, as in the first option);
3) purchase of goods and services produced in other countries.
The patterns of changes in aggregate demand determine the entire life of the country, and therefore they are studied

Aggregate demand function

Let us first conduct a graphical analysis of this dependence. The initial joint equilibrium in the markets for goods, money and capital is represented by point E0. The equilibrium volume of aggregate demand in the goods market is established at a certain initial price level P0. Let's mark it on the ordinate axis of the lower part. Point A formed at the intersection of the values ​​y0 and P0 is one of the points on the graph yD(P).

Let the price level rise to P1. Then, for a given nominal amount of money, its real value will decrease, as a result of which the LM curve will shift to the left: LM0 LM1. Joint equilibrium in the goods and financial markets will become possible only with the values ​​of y1, i1. Therefore, at the price level P1, effective demand will be equal to y1. Therefore, point B also lies on the graph of yD(P).

If the price level falls to P2, the real quantity of money in circulation will increase and a shift LM0 LM2 will follow. The amount of effective demand will increase to y2. The coordinates P2, y2 in the lower part correspond to point C. By connecting all the points of the aggregate demand function found in this way, we obtain its graph yD(P). When household consumption depends not only on real income, but also on real cash balances as part of the property, then when the price level rises, consumer demand decreases at any interest rate due to a reduction in real cash balances. Therefore, in the upper part, simultaneously with the shift LM0 LM1, the IS IS shift will occur, and as a result, in the lower part, instead of point B, we will get point B."

Accordingly, when the price level decreases, simultaneously with the shift LM0 LM2, a shift occurs in IS IS"", and then on the aggregate demand graph there will be not point C, but point C"". Consequently, in the presence of the effect of real cash balances, aggregate demand becomes more elastic with respect to the price level (graph yD(P) becomes flatter).

Aggregate demand theory

The “General Theory” (we will call it for short, as is usually done), by all accounts, is a very obscure and poorly constructed work. After its publication, countless articles and symposiums were devoted to the topic "What is the meaning of the General Theory." This indicates that everyone considered the book extremely important, but no one was completely sure what this importance was. Books and articles about what Keynes really meant continue to appear today, half a century after the publication of The General Theory.But everyone agrees on at least this much: Keynes believed, first, that the traditional approach of economists to The problem of recessions essentially ignored the problem itself and, secondly, that the economies of modern industrialized countries such as Great Britain or the United States do not tend to automatically move towards full employment.

Order and disorder in economic systems

The theory that Keynes criticized was the theory of ordered coordination. But if recessions occur as a result of breakdowns in the coordinating mechanism, then it is quite clear that we do not have to expect a satisfactory explanation of them and a means of combating them from a theory that assumes that the mechanism works normally.

Traditional economic theory viewed recessions as periods of temporary excess. Indeed, during a recession, workers cannot find work and goods remain unsold. The supply of labor and manufactured goods is higher than the demand for them. Any economist will tell you that to eliminate the surplus you need to lower the price. If workers can't find work, it means they want wages that exceed their value to the employer. With lower wages, everyone who wants to work would be able to find a job. If manufacturers cannot sell all their output, then they are asking too high a price; at a low enough price, all products that bring at least some benefit can be sold. This is the nature of supply and demand. A recession is simply a temporary deviation from equilibrium. It will end as soon as prices and wages reach their equilibrium, “market clearing” level.

But how long will this process take? It occurs instantly only on economists’ charts. In reality, the search for equilibrium prices can last for weeks, months, or even longer. Meanwhile, life does not stand still. Unemployed people, not receiving income, reduce their spending, which further reduces demand. Manufacturers, overwhelmed with inventories of products that no one wants to buy, cut production, lay off more workers, and reduce demand for raw materials and other goods needed for production. Thus, before prices fall sufficiently to eliminate the surplus, excess supply of labor and manufactured goods may well cause a chain reaction of lower incomes and lower demand. In this case, to eliminate the increased gap between supply and demand, prices will have to fall even lower. Don't we see this cumulative process during recessions: falling output, falling income, further falling production, and further falling income?

The timeless equilibrium approach inherent in traditional economic theory, in the spirit of which Keynes was brought up, made it impossible to explore this groping search for a new equilibrium. It assumed that if the old equilibrium was disturbed, there would be an instantaneous jump to a new equilibrium. But if the causes of recessions occur precisely when the economy goes out of equilibrium, then traditional theory really ignores the whole problem.

In addition, Keynes vigorously emphasized the role of expectations in economic decision making. The importance of this role is explained by the fact that decisions are made under conditions of uncertainty, when there is a high probability of error, when time is required to adapt to unexpected events, in short, when there is chaos in the economic system. All this had no place in the timeless, orderly, error-free world of traditional equilibrium analysis. In The General Theory, Keynes tried to explain economic downturns by the effects of uncertainty and the duration of adjustment. This prompted him to focus his attention on the movement of aggregate demand.

The concept of aggregate demand

Aggregate demand is a model that represents a graph in the form of a curve illustrating the change in the total real level of purchases planned by all consumers depending on changes in the price level. All other things being equal, the lower the price level, the more total volume of goods people are willing to purchase.

The aggregate demand curve shows how much GDP is willing to purchase at a given price level. Along the aggregate demand curve, the money supply is constant; its change will cause a shift in the aggregate demand curve.

In the structure of aggregate demand we can distinguish:

1) demand for consumer goods and services,
2) demand for investment goods,
3) demand for goods and services from the state,
4) demand for our exports from foreigners.

Factors influencing aggregate demand

The effect of interest rates is that when prices rise, buyers of goods and services need more money to pay for their agreements. Consequently, the demand for money increases, which, with a constant money supply, causes an increase in its price, i.e. interest rate. As a result, aggregate demand decreases due to the demand for those goods for the purchase of which you need to borrow money. This applies primarily to investment goods, as well as expensive consumer goods, which primarily include durable goods (cars, apartments, televisions, etc.).

The wealth effect is expressed in the fact that when prices rise, the real value, that is, the purchasing power, of accumulated financial assets with a fixed income (bonds, time deposits, etc.) held by the population decreases. In this case, the owners of financial assets become actually poorer, which reduces their demand, and, conversely, in conditions of falling prices, the real value of financial assets increases, which increases the demand from their owners.

The net export effect reflects the influence of the external sector of the economy on aggregate demand and GDP. It occurs when the prices of domestic goods are higher or lower than the prices of foreign goods. If domestic prices rise relative to prices abroad, then buyers will begin to give preference to imported goods, which will cause an increase in imports. At the same time, foreigners will begin to buy fewer domestic goods, which will cause a decrease in exports. Consequently, under other constant conditions, rising prices within the country causes an increase in imports and a decrease in exports. As a result, net exports as a part of aggregate demand are reduced.

The factors discussed above are price factors of aggregate demand, which indirectly realize the inverse dependence of aggregate demand on price. Their influence on aggregate demand is reproduced on the graph using the movement of the economy along a stationary aggregate demand curve.

For macroeconomic analysis, the slope of the aggregate demand curve is of great importance. This depends on how significantly price factors affect total costs. Thus, purchases of goods and services through loans and income from financial assets occupy a small part of total expenses.

Changes in net exports under the influence of prices also cannot have a significant impact on the dynamics of total expenditures. In this regard, it would be appropriate to assume that