Macroeconomics For Dummies

Chapter 10

Working Out a Country’s Economic Demand

IN THIS CHAPTER

Introducing aggregate demand

Understanding the components of demand

Looking at movements along and shifts in the aggregate demand curve

Macroeconomists are a pretty stable group. In fact, some might not do anything wilder than ride down the escalator without holding on to the handrail. Or maybe they’ll leave the caps off their felt tip pens overnight.

Yet when it comes to modeling the macro economy, they become a little schizophrenic. In particular, macroeconomists often use a very different model for the short run than they do for the long. The model they use for the short run is typically called the aggregate demand–aggregate supply (AD–AS) model. Because the short run is really not that short — a lot of economic life is lived and a lot of economic policy is made in the short run — the AD-AS model is central to much macro analysis. Even when economists adopt a long-run framework they often continue to use the language of the AD-AS model in talking about their results.

The AD-AS model is built on simple, sensible intuition. Used carefully, it can be helpful for both explaining and predicting macroeconomic events.

This chapter explores one half of the AD–AS model: aggregate demand (AD). As its name suggests, you can think of AD as representing the combined demand for goods and services of all economic agents — ...