Chapter 12 notes

Chapter 12 notes - Chapter 12 notes Aggregate Demand and Aggregate Supply Analysis Aggregate Demand Fluctuations in the unemployment rate are

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 12 notes Aggregate Demand and Aggregate Supply Analysis Aggregate Demand Fluctuations in the unemployment rate are caused mainly by fluctuations in real GDP. Aggregate Demand and Aggregate Supply Model : a model that explains short-run fluctuations in real GDP and the price level. o Fluctuations in real GDP and price levels are caused by shifts in the AD and AS curves. Aggregate Demand curve : a curve showing the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government. Short-Run Aggregate Supply curve : a curve showing 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? Y = C + I + G + NX The aggregate demand curve is downward sloping because a fall in the price level increases the quantity of real GDP demanded. The Wealth Effect: How a change in the price level affects consumption As total household wealth rises, consumption will rise. Some household wealthy is held in cash or other nominal assets that lose value as the price level rises and gain value as the price level falls. When the price level rises, the real value of household wealth declines, and so will consumption. This impact of the price level on consumption is called the wealth effect. The Interest-Rate Effect: How a change in the price level affects investment When price levels rise, firms and households need more money to finance buying and selling. o When the price level rises households and firms try to increase the amount of money they have by withdrawing funds from banks, borrowing from banks, or selling financial assets, such as bonds. o This drives up interest rate charged on bank loans and bonds. A higher interest rate = less borrowing = reduced consumption. A higher price level = more investment = more consumption. This affect of the price level on investment is known as the interest-rate effect. The International-trade effect: How a change in the price level affects net exports A lower price level in the US causes NX to rise. This impact is known as the international-trade effect. Shifts of the AD Curve versus Movements along it The AD curve tells us the relationship between the price level and the quantity of real GDP demanded, holding everything else constant. If price changes, the economy will move up or down the stationary AD curve. If anything other than price level changes, then the AD curve will shift. Variables that Shift the AD curve Three categories: o Changes in government policies o Changes in the expectations of households and firms
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
o Changes in foreign variables Changes in Government Policies Monetary policy involves changes in interest rates. Fiscal policy involves changes in government purchases and taxes.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/22/2007 for the course ECON 205 taught by Professor Kamrany during the Fall '07 term at USC.

Page1 / 6

Chapter 12 notes - Chapter 12 notes Aggregate Demand and Aggregate Supply Analysis Aggregate Demand Fluctuations in the unemployment rate are

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online