Unit 5 AD (1).pdf - iI:1;i'19]Aggregate demand(AD and...

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Economics: A Contemporary Introduction
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Chapter 25 / Exercise 2
Economics: A Contemporary Introduction
McEachern
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iI :1 !;i '19 [] [] Aggregate demand (AD) and aggregate supply (AS) curves look and operate much like the market supply and demand cm'ves used in microeconomlcs. However, aggregate demand and aggregate supply curves depict somewhat different concepts, and they change for different reasons. AD and AS curves are used to illustrate changes in real output and the price level of an economy. Shifts in AD can change the level of output, the price level or both. The determinants of AD include consumer spending, investment spending, government spending, net export spending, and government policies. [] [] [] The downward slope of the AD curve is explained by the interest rate effect, the wealth effect, and the net export effect. The wealth. effect is also called the real-balance effect. The upward slope of the short-run aggregate supply curve (SRAS) is explained by fixed input costs (e.g., sticky wages). The long-rmÿ aggregate supply (LRAS) curve is vertical at the full-employment level of output. The marginal propensity to consume (MPC) is the additional consumption spending from an additional dollar of income. The marginal propensity to save (MPS) is the additional savings from an additional dollar of income. MPC + MPS = 1. The spending multiplier shows the rdationship between changes in spending and the maximum resulting changes in real gross domestic product (GDP). The simple spending multiplier is given as: 1 1
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Economics: A Contemporary Introduction
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Chapter 25 / Exercise 2
Economics: A Contemporary Introduction
McEachern
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