Lecture14-ECO100 - Introduction to Introduction to...

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CO 100Y ECO 100Y troduction to Introduction to conomics Economics Lecture 14: ggregate Demand and Aggregate Demand and ggregate Supply © Gustavo Indart Slide 1 Aggregate Supply
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The Price Level and Aggregate Expenditure ± An increase in the price level ( P ) shifts the AE curve downward ± A decrease in the price level ( P ) shifts the AE curve ward upward ± This shift of the AE curve is due to the effect of changes in P on consumption ( C ) and net exports ( NX ) © Gustavo Indart Slide 2
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Wealth and the Consumption Function ± According to the Life-Cycle theory of consumption ¾ Households save in order to accumulate wealth that ey can use during their retirement they can use during their retirement ± An unexpected rise in wealth would shift the consumption curve up (and the saving curve down) ¾ That is, less will be needed to be saved for ti t retirement © Gustavo Indart Slide 3
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Changes in P and the Consumption Function ± Changes in P affect C through their impact on real wealth ± An increase in P lowers real wealth educes the real value of money ¾ Reduces the real value of money ¾ Bondholders’ perception of their wealth also ecreases decreases © Gustavo Indart Slide 4
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Shifts of the Consumption and Saving Functions C C An increase in P decrease real wealth, thus causing the S curve to shift up and C’ the C curve to shift down. S YD S YD 0 At each level of YD households will need to save more for retirement. S’ YD 1 YD © Gustavo Indart Slide 5
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The Effect of an Increase in P th AE C on the AE Curve CC n increase in P decrease An increase in P decrease real wealth, thus causing savings to increase and tonomous consumption C C Y autonomous consumption to decrease. AE AE The decrease in autonomous consumption AE’ causes the AE curve to shift down by ± C. ± Y = β E ± C C © Gustavo Indart Slide 6 Y Y 1 Y 0 AE
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The Impact of a Change in P on Net Exports ± An increase in P makes domestic goods relatively more expensive than foreign good ± Therefore, NX decreases as P increases ¾ Exports decrease po s d c s ¾ Imports increase © Gustavo Indart Slide 7
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The Effect of an Increase in P on Equilibrium Income AE AE(P 1 ) E(P AE(P 2 ) AE P 2 > P 1 Y Y 1 * 45º Y 2 * Y = β AE AE © Gustavo Indart Slide 8
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The Aggregate Demand Curve ± The price level and equilibrium income are negatively
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Lecture14-ECO100 - Introduction to Introduction to...

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