KW_Macro_Ch_10_Sec_02_Aggregate_Demand

# KW_Macro_Ch_10_Sec_02_Aggregate_Demand - chapter 10...

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>> Aggregate Supply and Aggregate Demand Section 2: Aggregate Demand chapter 10 Just as the aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied by producers, the aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, firms, the government, and the rest of the world. Figure 10-6 shows an aggregate demand curve, AD . One point on the curve corresponds to actual data for 1933, when the aggregate price level was 8.9 and the total quantity of domestic final goods and services purchased was \$636 billion in 2000 dollars. AD is downward-sloping, indicating a negative relationship between the aggregate price level and the quantity of aggregate output demanded. A higher aggregate price level, other things equal, reduces the quantity of aggregate out- put demanded; a lower aggregate price level, other things equal, increases the quanti- ty of aggregate output demanded. According to Figure 10-6, if the price level in 1933 had been 5.0 instead of 8.9, the total quantity of domestic final goods and services demanded would have been \$950 billion in 2000 dollars instead of \$636 billion. The aggregate demand curve shows the relation- ship between the aggregate price level and the quanti- ty of aggregate out- put demanded by households, busi- nesses, the govern- ment, and the rest of the world.

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Why Is the Aggregate Demand Curve Downward-Sloping? In Figure 10-6, the curve AD is downward-sloping. Why? Recall the basic equation of national income accounting: (10-2) GDP = C + I + G + X IM 2 CHAPTER 10 SECTION 2: AGGREGATE DEMAND Figure 10-6 5.0 8.9 Agg r egate p r ice level (GDP deflato r , 2000 = 100) Aggregate demand curve, AD 1933 A movement down the AD curve leads to a lower aggregate price level and higher aggregate output. 0 950 \$636 Real GDP (billions of 2000 dolla r s) The Aggregate Demand Curve The aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggre- gate output demanded. The curve is downward-sloping due to the wealth effect of a change in the aggregate price level and the interest rate effect of a change in the aggregate price level. Corresponding to the actual 1 9 33 data, here the total quantity of goods and services demanded at an aggregate price level of 8 . 9 is \$ 636 billion in 2000 dollars. According to our hypo- thetical curve, however, if the aggre- gate price level had been only 5.0, the quantity of aggregate output demand- ed would have risen to \$9 50 billion.
where C is consumer spending, I is investment spending, G is government purchases of goods and services, X is exports to other countries, and IM is imports. If we mea- sure these variables in constant dollars—that is, in prices of a base year—then C + I + G + X IM is the quantity of domestically produced final goods and services demand- ed during a given period. G

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## This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_10_Sec_02_Aggregate_Demand - chapter 10...

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