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CH 23 - Ouput + Prices in Short Run

CH 23 - Ouput + Prices in Short Run - CHAPTER 23 OUTPUT...

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CHAPTER 23 OUTPUT + PRICES IN THE SHORT RUN 23.1 THE DEMAND SIDE OF THE ECONOMY EXOGENOUS CHANGES IN THE PRICE LEVEL Changes in Consumption: indirectly related to AE curve o A rise in the price level lowers the real value of money held by the private sector. o A fall in the price level raises the real value of money held by the private sector o Changes in the price level change the wealth of bond holders + bond issuers, but because the changes offset each other, there is no change in aggregate wealth o Rise in the domestic price level = decrease in private sector wealth + desired consumption downward shift in AE curve o Fall in domestic price level = increase in private sector wealth + desired consumption upward shift in AE curve Changes in Net Exports: indirectly related to AE curve o Rise in Domestic Price Level = shifts net export function downward downward shift in AE curve o Fall in Domestic Price Level = shift net export function upward upward shift in AE curve Changes in Equilibrium GDP: The AE curve shows desired AE fro each level of GDP @ a particular price level o Its intersection with the 45 o line determines equilibrium GDP for that price level o Equilibrium GDP thus occurs where desired AE = Actual GDP o A change in the price level changes private-sector wealth + causes a shift in the AE curve Price Level Rise = Downward shift Price Level Fall = Upward shift Results in a new equilibrium level of GDP THE AGGREGTE DEMAND CURVE Aggregate Demand (AD) Curve = a curve showing combinations of real GDP + the price level that make desired aggregate expenditure equal to actual national income For any given price level, the AD curve shows the level of real GDP for which desired AE = actual GDP Rise in the price level = lowers exports + lowers autonomous consumption expenditure (because it decreases wealth) o
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