Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Part III


Building a Model of the Economy


© John Wiley & Sons


The IS-LM model is an important model that shows how the economy responds to fiscal and monetary policy in the very short run. Check out the free article at www.dummies.com/extras/macroeconomicsuk

for details.

In this part …


Aggregate demand makes up one half of the Aggregate Demand– Aggregate Supply (AD–AS) model. Find out what makes up aggregate demand and examine the AD curve.


Aggregate supply makes up the other half of the AD–AS model. Discover what factors affect how much firms can produce and how aggregate supply affects prices and economic growth.

After you understand both sides of the AD–AS model, you can put it to work analysing shocks to the economy.

Chapter 7


Working Out a Country’s


Economic Demand


In This Chapter


Introducing aggregate demand


Understanding its different components


Looking at the aggregate demand curve
Economists love models. We don’t mean the men and women who grace the world’s catwalks (although some may – who are we to judge?), but models of how the economy behaves. The Aggregate Demand–Aggregate Supply (AD– AS) model is the workhorse model of macroeconomics. Economists love it because it’s a simple model that can accurately predict how the economy will respond to different situations.

In this chapter you discover 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: in other words, the combined demand of consumers, firms and the government. (To read about aggregate supply (AS), flip to Chapter 8.) We describe the various parts that make up aggregate demand and examine the AD-curve. Along the way you see why AD increases when the price level falls and how the exchange rate affects a country’s net exports. Although we have to include a fair amount of maths, don’t worry: we lead you through it and explain everything clearly step-by-step.