Lecture-10-slides

Lecture-10-slides - Lecture 10 THE AD-AS MODEL Reference...

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1 Lecture 10: THE AD-AS MODEL Reference: Chapter 8 LEARNING OBJECTIVES 1.What determines the shape of the aggregate demand (AD) curve and what factors shift the entire curve. 2.What determines the shape of the aggregate supply (AS) curve , and what factors shift the entire curve. 3.How the equilibrium price level and real GDP are determined. 4.How the economy arrives at its long run equilibrium. 5.Equilibrium vs full-employment GDP.
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2 I. Introduction to AD-AS Model A. AD-AS model is a variable price model. The aggregate expenditures model in Chapters 7 assumed constant prices. B. AD-AS model provides insights on inflation, unemployment and economic growth. II. Aggregate demand is a schedule that shows the various amounts of real domestic output that domestic and foreign buyers will desire to purchase at each possible price level. A. The aggregate demand curve is shown in Figure 8-1.
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3 1. Inverse relationship between price level and domestic output. 2. The explanation of the inverse relationship is not the same as for demand for a single product, which centered on substitution and income effects. a. Substitution effect doesn’t apply in the aggregate case, since there is no substitute for “everything.” b. Income effect also doesn’t apply in the aggregate case, since income now varies with aggregate output. 3. What is the explanation of inverse relationship between price level and real output in aggregate demand? a. Real balances effect : b. Interest-rate effect: c. Foreign trade effect:
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4 B. Determinants of AD : “Other things” (besides price level) that can cause a shift or change in AD. 1. Changes in consumer spending, which can be caused by changes in several factors. a. Consumer wealth b. Consumer expectations c. Household indebtedness d. Taxes 2. Changes in investment spending, which can be caused by changes in several factors. a. Real Interest rates
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5 b. Expected returns, which are a function of Expected future business conditions Technology Degree of excess capacity Business taxes 3. Changes in government spending. 4. Changes in net export spending
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This note was uploaded on 06/20/2009 for the course ECN 204 taught by Professor Unknown during the Spring '09 term at Ryerson.

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Lecture-10-slides - Lecture 10 THE AD-AS MODEL Reference...

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