ECON 102 - 3:54:00 PM MACROECONOMICS PRELIM 2 Chapter 13...

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07/04/2008 14:54:00 MACROECONOMICS PRELIM 2 Chapter 13 The money required to make a given number of transactions depends directly and proportionately on the average price of those transactions o As prices and wages rise, households will want to keep more money Money demand is a function of three variables o Interest rate, Level of real income, Price level Money demand will increase in interest rates go down or price levels increases or if income increases Aggregate demand is the total demand for goods and services in the economy o Derived by seeing what happened to income and the price level changes o Derived by assuming the fiscal policy, G and T, and the monetary policy variable o Increase in price level increases the demand for money o Three panel diagram Increase in the price level causes the income to fall, vise versa o AD Curve – each pair of values on the aggregate demand curve corresponds to a point at which the goods market and the money market are in equilibrium o Used when overall price level prices o AD falls when the price level increases because the higher price level causes the demand for money to rise. With the money supply constant, the interest rate will rise to reestablish equilibrium in the money market. It is the higher interest rate that causes aggregate output to fall. o Not the sum of all the market demand curves in the economy o If the interest rate changes in the money market, it affects consumption and planned investment
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o Consumption link is another reason for the AD curve downward slope Increase in price level increases demand for money, which increases the interest rate which decreases consumption which leads to a decrease in aggregate output. Planned investment does not bear all the burden of providing the link from a higher interest rate to a lower aggregate output. Decreased consumption brought about by a higher interest rate also contributes to this effect o An increase in the price level may lower the real values of some types of wealth (stocks and housing) o An increase in the price level lowers the real value of wealth which leads to a decrease in consumption and a decrease in aggregate output o At every point a long the AD curve, the quantity demanded is exactly equal to planned aggregate expenditure, C+I+G o An increase in the quantity of money supplied shifts the AD curve to the right o Increase in G or T also increases AD, shift to the rights Aggregate supply is the total supply of all goods and services in the economy o AS curve shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level o If output prices increase, there will be an increase in some input prices o Why not sum Unrealistic to assume that wages do not rise at all when the overall price level rises, all input price are not constant and as the overall price level changes, individual supply curves shift, cannot sum them Individual firms do not respond to price determined in market, instead
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This note was uploaded on 05/09/2008 for the course ECON 1120 taught by Professor Wissink during the Fall '05 term at Cornell.

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ECON 102 - 3:54:00 PM MACROECONOMICS PRELIM 2 Chapter 13...

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