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EC102-14SPRING09b - 141 Aggregate Demand and Aggregate...

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Aggregate Demand and Aggregate Supply  1Introduction o Recessions o http://en.wikipedia.org/wiki/Recession     o http://canadianeconomy.gc.ca/english/economy/recession.html     14-1
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Three Key Facts about Economic Fluctuations o Economic Fluctuations are Irregular & Unpredictable o Most Macroeconomic Quantities Fluctuate Together o As Output Falls, Unemployment Rises 14-2
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Okun’s Law o Change in cyclical unemployment = o - ½ * (percent change in real GDP  - 4 %) Exercise: o Calculate the change in cyclical unemployment when real  GDP grows at an average rate of 3% 14-3
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Aggregate Demand and Aggregate Supply Model Aggregate Demand  Aggregate Demand Curve 14-4
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The Slope of the Aggregate Demand Curve Recall the basic equation of national income accounting: o GDP = C + I + G + X IM 14-5
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Diagram 1:  The Aggregate Demand Curve 14-6 P AD Y 0
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14-7
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Aggregate demand curve slopes downward for reasons other  than individual demand curve o Export-Import effect o Interest rate effect on investment o Drawn holding all other variables constant o i.e. the money supply and FXR 14-8
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Export-Import Effect Example: 14-9
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Diagram 2:  The Export-Import Effect 14-10 P AD Y 0 P 0 Y 0
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o Assume P falls relative to P F  holding FXR constant 14-11
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Interest Rate Effect on Investment   14-12
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Diagram 3:   A Decrease in the Money Demand MS Interest Rate r 0 E 0 14-13
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Diagram 3:  A Decrease in the Money Demand Quantity of Money 0 Md 0 MS Interest Rate 14-14
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Quantity of Money 0 Md 0 E 0 E 1 r 0 r 1 Md 1 14-15
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Diagram 4:  Interest Rate Effect on Investment P AD Y 0 P 0 Y 0 14-16
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o Discuss how a change in P affects money demand 14-17
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Factors that Cause the AD Curve to Shift Left o Change in Exports  o http://www.thestar.com/article/529418     o Change in Imports  o Business and/or Consumer Confidence o http://www.thestar.com/article/534345     14-18
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http://canadianeconomy.gc.ca/english/economy/2001September11.html 14-19
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Change in Government Policy o Fiscal Policy o Taxes o Transfer Payments o Government Expenditures 14-20
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