Macroeconomics

9-4

Aggregate Supply

By itself, the aggregate demand curve does not tell us the price level or the

amount of output that will prevail in the economy; it merely gives a relationship

between these two variables. To accompany the aggregate demand curve, we

C H A P T E R   9

Introduction to Economic Fluctuations

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Shifts in the Aggregate Demand Curve

Changes in the money supply shift the

aggregate demand curve. In panel (a), a decrease in the money supply M reduces the

nominal value of output PY. For any given price level P, output Y is lower. Thus, a

decrease in the money supply shifts the aggregate demand curve inward from AD

1

to

AD

2

. In panel (b), an increase in the money supply M raises the nominal value of

output PY. For any given price level P, output Y is higher. Thus, an increase in the

money supply shifts the aggregate demand curve outward from AD

1

to AD

2

.