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

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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) o Policy changes o The world economy changes - Expectation change o Expected future income o People are going to spend because they know they will earn more. o Expected future income increase => shift of Demand function o Media could affect this as well. o Expected future profit
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Create incentive for firms to investment (firms expect they will make money and invest in there) Expected future income increase
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