Macro(last test handouts)

Macro(last test handouts) - 1 Econ 144 C. Morris Aggregate...

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Econ 144 C. Morris Aggregate Demand and Aggregate Supply (Handout #1 for Ch.15) Definition Natural Rate of Output (Y N ) = the total amount of final goods and services produced in an economy when unemployment is at its natural (or normal) rate. It is the total output level we used when we discussed the growth in real GDP. Actual Real GDP fluctuates around the natural rate of output during a business cycle. There are forces in the economy that always bring the output level back to the natural rate of output. Aggregate Demand Definition: Aggregate demand curve (AD) shows the total quantity of all goods and services demanded in the economy at each price level, P (GDP deflator or CPI). Can redefine AD Curve as: AD curve shows the total quantity of all Consumption goods, Investment goods, & Government purchases demanded in the economy at each price level , P. Why is the AD curve negatively sloped? Answer: Will NOT be for same reason that the demand curve in an individual market is negatively sloped. An increase in the price level (P) will cause the aggregate quantity of goods and services demanded to decrease for two reasons. First, an increase in the price level decreases the real wealth of households, who will then decrease the quantity demanded of consumption goods. Second, an increase in the price level will cause individuals to want to increase their nominal money holdings, which they accomplish by selling bonds and withdrawing funds from their interest-bearing bank accounts. This increases the interest rate, which then causes firms to decrease the quantity demanded of investment goods. In summary: When P↑ → aggregate quantity demanded ↓ Factors that Shift AD Factors other than the price level affect the aggregate demand for goods and services. When one of these factors change, the AD curve shifts. Shifts Due to ∆’s in Consumption: 1. Change in HH’s expectations about their future income (perhaps due to changes in the stock market or uncertainty due to wars) If households think that their future income may fall 2. Change in Net Taxes (T = net taxes = taxes – transfer payments) If the government increases T (independent of P) 1
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3. Change in the money supply (next chapter) Shifts Due to ∆’s in Investment: 1. Change in Firm’s expectations about the future business conditions: If firms think that their future revenues may decrease because the economy is entering a recession 2. Change in technology that affects all industries Note: This will also shift LRAS curve to the right in the future Suppose new computer technology is introduced that makes computers faster 3. Change in taxes that affect businesses (investment tax credit or corporate profit tax) Suppose the corporate profit tax is increased amount of investment expenditures firms would desire at each P aggregate quantity demanded at each P AD curve shifts to left 4. Change in the money supply (next chapter) Shifts Due to ∆’s in Government Purchases:
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Macro(last test handouts) - 1 Econ 144 C. Morris Aggregate...

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