econ3 11-2

econ3 11-2 - Chapter 11 continued Aggregate Demand o How...

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Unformatted text preview: 3-3-08 Chapter 11 continued - Aggregate Demand o How much produce and purchase at any other time (relationship is Real GDP vs. quantity - Why does AD slope downward? o Wealth effect Increase price level => Decrease real wealth o Substitution effect Increase PL => increase nominal interest rate • Increase PL reduce purchase money o So increase interest rate Increase PL => increase real exchange rate • Price of Domestic increase and foreign good $decrease. - AD shifts when o Expectation change (doctor vs. teacher… people want to be doctor because they expect doctors earn more money) Policy changes The world economy changes o o - Expectation change o o o o o Expected future income People are going to spend because they know they will earn more. Expected future income increase => shift of Demand function Media could affect this as well. Expected future profit Create incentive for firms to investment (firms expect they will make money and invest in there) Expected future income increase => increase in consumption Expected future profit increase => increase in investment (by business) Expected inflation increase => increase in consumption today • ALL LEADS TO SHIFT OF DEMAND FUNCTION o Expected inflation Gas increase tomorrow then people will buy gas now Belief in inflation lead to buy more good - Policy changes o Fiscal policy Tax, increase spending o Increase government spending, directly increase aggregate demand Y= C+I+G+NX DECREASE net taxes => INCREASE consumption o Monetary policy Fed. Control the monetary base (reserve in banks) Increase supply => decrease I.R. => increase investment - World economy changes o Exchange rate Decrease exchange rate => Increase net export o Foreign income Increase foreign income => increase net export o - SHIFT AD TO RIGHT!!! MACROECONOMIC EQUILIBIRUM o o Short-run equilibrium Long-run equilibrium ...
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This note was uploaded on 12/02/2009 for the course ECON econ taught by Professor For got during the Spring '09 term at UCSD.

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econ3 11-2 - Chapter 11 continued Aggregate Demand o How...

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