Economics 100B - 26 (4-19-2007)

Economics 100B - 26 (4-19-2007) - Economics 100B Professor...

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Professor Steven Wood 4/19/07 Lecture 26 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. LECTURE Today we are going to discuss how the price level is determined in the macroeconomy through the aggregate supply/demand model. AD-AS Model This model allows us to endogenize the general price level, P. The rate of change in P is inflation so, indirectly, we are also endogenizing inflation. Aggregate Demand Curve We will first derive the aggregate demand curve from the IS/LM framework. We find out the changes in our IS/LM model when the price level changes and plot the new price level and income level to derive aggregate demand. The aggregate demand curve is the combinations of income, interest rates, and price levels that generate equilibrium in both the market for goods and services and the market for money. Thus: 1) A high price level lowers aggregate demand. 2) A low price level boosts aggregate demand. 3) Changes in prices lead to changes in the real money supply which leads to changes in interest rates. These changes in interest rates are what lead to changes in income. So what shifts the aggregate demand curve? 1) Any increase in autonomous planned spending. This implies: a. Any fiscal policy changes aggregate demand. 2) Any change in monetary policy or the nominal money supply. 3)
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This note was uploaded on 09/20/2009 for the course ECON ECON taught by Professor Shomali during the Spring '04 term at University of California, Berkeley.

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Economics 100B - 26 (4-19-2007) - Economics 100B Professor...

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