Aggregate Supply and Demand

Aggregate Supply and Demand - CH. 15: AGGREGATE DEMAND AND...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
CH. 15: AGGREGATE DEMAND AND AGGREGATE SUPPLY AGGREGATE DEMAND (AD) Shows the quantity of goods and services that various demanders in the economy want to buy at different price levels. Copy the sample AD curve from the transparency. Note the negative slope. Three Reasons Why AD Curve Is Downward-Sloping Income Effect One AD curve assumes constant nominal income. At higher price levels, demanders can afford less. At lower price levels, demanders can afford more. An increase in income causes a rightward shift in AD while a decrease in income causes a leftward shift in AD. Real Balance Effect (NOT IN YOUR TEXTBOOK) One AD curve assumes constant money supply. At higher price levels, can demanders afford more or less with the same amount of dollars? Less At lower price levels, can demanders afford more or less with the same amount of dollars? More An increase in the money causes AD to shift to the right A decrease in the money supply causes AD to shift to the left. Exchange Rate Effect One AD curve assumes constant exchange rate. When imports become cheaper due to a change in exchange rates, imports (not in GDP) rise and exports fall. People domestically and abroad substitute more goods produced in other countries.When domestic goods become cheaper due to a change in exchange rates, exports rise and imports fall. AD Shifts Right We can use Keynesian cross diagram to construct AD
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Keynesian cross is criticized as being mainly for AD Factors shifting AD Income (+), interest rates(-), money supply (+), exchange rates(-), wealth(+), expectations of future variables (+), anything else causing a change in C, I, G, and NX A plus sign represents a positive relationship. Thus, for example, if income increases; AD shifts right. If income decreases, AD shifts left. A negative sign represents a negative relationship. For example, an increase in interest rates causes AD to shift left. A decrease in interest rates causes AD to shift right. Real GDP Real GDP (Y) Price level P0 P1 Agg Expenditure (AE) AE=GDP Abar 0 AE= Abar 0 +Mpc x Y Price level= P0 Abar 1 AE= Abar1+mpc x Y Price Level= P1<P0 AD
Background image of page 2
Draw a diagram with price levels on the vertical axis and real GDP on the horizontal axis. Use this
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/02/2008 for the course ECON 2105 taught by Professor Rudbeck during the Spring '08 term at University of Georgia Athens.

Page1 / 9

Aggregate Supply and Demand - CH. 15: AGGREGATE DEMAND AND...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online