Chapter 12

Chapter 12 - Chapter 12 Aggregate Demand and Aggregate...

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Chapter 12: Aggregate Demand and Aggregate Supply Analysis Aggregate Demand Aggregate Demand and aggregate supply model: a model that explains short-run fluctuation in real GDP and the price level Aggregate demand curve (AD): o A curve showing the relationship between the price level and the quantity of real GDP demanded by households , firms, and the government Short-run supply curve o A curve showing the relationship between in the short run between the price level and the quantity of real GDP supplied to firms Why is the aggregate demand curve downward sloping? o Y = C + I + G + NX o Downward sloping because a fall in the price level increases the quantity of real GDP o The wealth effect: how a change in the price level affects consumption The more income you have the more you will spend (GDP is a normal good) Consuming more boosts your GDP o The interest-rate effect: How a change in the price level affects investment If there is a change in the price level (price goes up), people will invest more because the interest rate will go down If interest rate goes down, there is more investment, and more consumption in the future o The international-trade effect: how a change in the price level affects net exports Comparing the general price level in the US and the general price level in another country If the price level increases in US more than Japan, then Americans will spend more on Japanese goods
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If general price level goes up then the real GDP will go down, which is why the demand level is downward sloping, and there is movement along the demand curve o Shifts of the AD versus movements along it The variables that shift the AD curve Changes in government policies o Monetary policy (change the interest rate) The actions the federal reserve takes to manage the money supply and interest Lowering the interest rate By printing money o Fiscal policy (increasing/decreasing taxes) If gov increases the income tax, people will have less money, then they will consume less, which will shift
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Chapter 12 - Chapter 12 Aggregate Demand and Aggregate...

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