Chapter 12 Study Guide

Chapter 12 Study Guide - Chapter 12 Study Guide2008-12-07...

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Chapter 12 Study Guide 20:22 Aggregate Demand and aggregate supply model: A model that explains short-run fluctuations in real GDP and the price level. Aggregate  Demand Curve:  Shows the relationship between price level and the quantity of real GDP  demanded by households, firms, and the government Short run aggregate supple curve: Shows the relationship in the short run between the price level and the  quantity of real GDP supplied by firms.  Why is the Aggregate Demand Curve Downward Sloping? Because a fall in the price level increases the quantity of real GDP  demanded.  o Changes in the price level affect each component of aggregate demand C + I + G + NX The Wealth Effect: o Current income is most important variable determining consumption of  households. As income rises, consumption will rise Income falls, consumption falls o Nominal Assets:  lose value as the price level rises and gain value as the  price level falls.  o When the price level rises, the real value of the household wealth  declines, and so will consumption. When the price level falls, the real 
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Chapter 12 Study Guide - Chapter 12 Study Guide2008-12-07...

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