Chapter 23

Chapter 23 - Chapter 23 The demand side of the economy...

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Chapter 23 The demand side of the economy Exogenous changes in the price level An increase in P reduces the real value of nominal money holdings – i.e. a $10 bill will buy less with an increase in price levels. A fall in P raises the real value of money holdings Changes in P also affect the wealth of bondholders and bond issuers – but there is no change in the aggregate wealth An increase in P thus reduces private-sector wealth – o reduction in desired consumption o downward shift in AE curve There is also an effect on exports: o the NX function shifts downward o further downward shift in AE curve changes in Equilibrium GDP – an increase in P shifts AE down, where the equilibrium Y falls they are inversely related. The Agrgregate Demand Curve – relates equilibrium real GDP to the price level o For any given P, the AD curve shows the level of real GDP for which desired aggregate expenditure equals the Real GDP ( see graph in book for rises in prices affecting AE and GDP) Increase in price levels in a country, increase AE, and a decrease in NX – through multiplier process you get a lower equilibrium value of GDP The change in price level cause shifts in AE function – causing a move along the
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Chapter 23 - Chapter 23 The demand side of the economy...

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