Aggregate Demand & Aggregate Supply Model | Simranjit Kaur | Unacademy UGC NET

Summary

This educational session, conducted in Hindi, focuses on microeconomics, particularly on key topics like Aggregate Demand and Aggregate Supply. The instructor covers their definitions, relationships with price levels, and the reasons behind their negative or vertical slopes in classical and Keynesian models. Key concepts such as the Real Balance Effect, Interest Rate Effect, and the impact of government spending, investment, and exports on Aggregate Demand are explained. The instructor also discusses shifts in Aggregate Demand and Supply, as well as the significance of monetary and fiscal policies in different economic models. The session aims to enhance understanding with practical examples and references for upcoming classes.

Takeaways

• 😀 The class covers essential topics in Microeconomics, including Aggregate Demand and Aggregate Supply, focusing on classical and Keynesian perspectives.
• 😀 The Aggregate Demand curve slopes downward due to effects like the Real Balance Effect, the Rate of Interest Effect, and the Export Effect.
• 😀 The Real Balance Effect explains how price decreases lead to an increase in demand due to increased real income.
• 😀 The Rate of Interest Effect indicates that lower prices can lead to lower interest rates, which in turn encourages more investment and increased demand.
• 😀 The Export Effect highlights that when domestic prices fall, the demand for domestic products increases from foreign markets, boosting exports.
• 😀 The Classical Aggregate Supply curve is vertical, indicating that in the long run, the economy reaches full employment, and output remains fixed.
• 😀 Keynesian Aggregate Supply is horizontal at lower levels of output, becoming vertical at full employment, reflecting a flexible response to demand changes.
• 😀 Aggregate Demand shifts can be caused by changes in government expenditure, investment, and net exports, all of which positively affect demand.
• 😀 Aggregate Supply shifts due to technological improvements, input price changes, taxes, and subsidies, affecting supply positively or negatively.
• 😀 In Classical Economics, wages and prices are flexible, which allows for automatic adjustments in the economy, while in Keynesian Economics, wages are sticky, leading to different policy implications.
• 😀 The session emphasizes the difference in effectiveness of monetary and fiscal policies in Classical and Keynesian models, with monetary policy being more effective in Classical economics.

Q & A

What is the focus of the class in this session?

The session focuses on understanding Aggregate Demand (AD) and Aggregate Supply (AS), particularly through the classical and Keynesian viewpoints. The lecture aims to explain the concepts, including their slopes, effects, and factors that influence them.

Why does the Aggregate Demand curve have a downward slope?

The Aggregate Demand curve slopes downward because, as prices decrease, the real income of individuals increases, leading to higher demand. Conversely, when prices increase, real income decreases, and demand falls.

What is the 'Real Balance Effect' in the context of Aggregate Demand?

The Real Balance Effect refers to the idea that when prices decrease, the real income of individuals increases, making them feel wealthier and encouraging more demand. This effect plays a role in the negative slope of the Aggregate Demand curve.

What role does interest rates play in Aggregate Demand?

When prices decrease, interest rates tend to fall, making investment more attractive. This increase in investment leads to higher Aggregate Demand. Additionally, lower interest rates encourage exports, further boosting demand.

How does the Classical Aggregate Supply curve behave?

In the Classical model, the Aggregate Supply curve is vertical, indicating that output is fixed in the long run, regardless of changes in price levels. This implies that changes in Aggregate Demand only affect prices, not output.

What factors lead to shifts in the Aggregate Demand curve?

Shifts in the Aggregate Demand curve are caused by changes in government expenditure, investment, and net exports. An increase in any of these will shift the AD curve to the right, while a decrease will shift it to the left.

What are the main reasons for shifts in the Aggregate Supply curve?

Shifts in the Aggregate Supply curve are influenced by factors like technological improvements, changes in input prices, taxes, and subsidies. For example, lower input prices or technological advances shift the AS curve to the right, increasing supply.

How does the Classical model view long-run output?

The Classical model assumes that long-run output is determined by factors like labor, capital, and technology. The Aggregate Supply curve is vertical in the long run because it is assumed that prices and wages are flexible and can adjust to maintain full employment.

What is the key difference between Classical and Keynesian views on Aggregate Supply?

The Classical view holds that the Aggregate Supply curve is vertical, meaning output is fixed in the long run and only prices adjust. In contrast, the Keynesian view often depicts the AS curve as horizontal, suggesting that output can be influenced by changes in Aggregate Demand, especially in the short run.

Why does the Classical model assume that wages and prices are flexible?

In the Classical model, wages and prices are assumed to be flexible because the model believes that the economy always returns to full employment. If wages or prices change, the economy will adjust through supply and demand to maintain equilibrium.