Chapter 13: AD and AS AD o AD: the level of real GDP purchased by households (C), businesses (I), government (g), and foreigners (NX) o Why does AD have a negative slope? Wealth effect Interest rate effect NX effect The Wealth effect: o Wealth = assets – liabilities o Assets: (WRE/P) and (WSM/P) o As the price level rises: the real value of wealth falls C falls o CPI o o o o o o
True or false ****(TEST QUESTION)
o An oil price shock results in a shortage and therefore increase in AD. o False (decreases AD) The US Economy in the LR and SR o LRAS (long run Aggregate Supply) o Identifies output at potential (full employment) o Potential output is determined by the Number of workers Capital stock Available technology o LRAS is vertical: changes in prices level do not affect the level of real GDP in the LR What does this mean? If the price out inputs doubles AND the price of output doubles, firms have no incentive to increase production Shifts in LRAS o Recall shifts in PPF o Change in resource base Change in number of workers Change in capital stock o Technological change/innovation o An Example :
GDP deflator is on Y, RGDP is on X Technological change, (adoption of the internet) Full employment output increases to Ybar 2 o Each year potential output increases as the resource base increase and technological changes occurs Shifts in AD o AD = C + I + G + NX o Change in AD is a change in any of those o Change in C Due to a change in Wealth Expected future income or consumer confidence Real interest rates Taxes o Change in I
Due to a change in Real interest rates EFP Technological change
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