AggregateDemandandSupplyQuiz.pdf - Aggregate Demand and...

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Aggregate Demand and Supply -AD=sum total of all planned expenditures in the economy vs. D-I of a product -AD curves gives total amount of real domestic income meaning the output of final goods and services in the economy that will be purchased at each price level **Need to consider 2 Issues: 1. What factors how much is spent (AD)? 2. Does an increase in spending lead to inflation or an increase in GDP? What happens when the price level rises? 1. The Direct Effect→ is that people buy less-as price rises-people literally need more $ to buy what they want- so buy less (also called “wealth” effect) 2. The Indirect effect (interest rate effect) → impacts your desire to spend- you might want to borrow $ to buy- along with everyone else- which pursues interest up- or you are less likely to borrow money to buy something big because the price of money has increased (the interest rate is price of $) a. Bottom line: As interest increases, Aggregate Demand decreases b. Effects spending on everything, as PL rises, to pay bills I have to borrow money to do it 3. The open economy effect→ as prices in the USA increases- foreigners buy less (they have a downward sloping demand curve for US goods)- end result: as prices increase,
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  • Fall '10
  • Mrs.Lifson

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