CH12 - 2009-10-7 Learning Objective 12.1 Why Is the Aggregate Demand Curve Downward Sloping GDP has four components consumption(C investment(I

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2009-10-7 1 Aggregate Demand and Aggregate Supply Analysis 1 Learning Objective 12.1 Aggregate demand and aggregate supply model A model that explains short-run fluctuations in real GDP and the price level. FIGURE 12.1 Aggregate Demand and Aggregate Supply 2 Learning Objective 12.1 Aggregate demand curve A curve that shows the relationship between the price level and the quantity of real GDP demanded by households firms and the government First, let’s focus on the static version. households, firms, and the government. Short-run aggregate supply curve A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms. 3 Learning Objective 12.1 GDP has four components: consumption ( C ), investment ( I ), government purchases ( G ), and net exports ( NX ). If we let Y stand for GDP, we can write the following: Y=C+I+G+NX Why Is the Aggregate Demand Curve Downward Sloping? Y = C + I + G + NX The Wealth Effect: How a Change in the Price Level Affects Consumption The impact of the price level on consumption is called the wealth effect . 4 Learning Objective 12.1 The impact of the price level on investment is known as the interest-rate effect . Why Is the Aggregate Demand Curve Downward Sloping? The Interest-Rate Effect: How a Change in the Price Level Affects Investment The International-Trade Effect: How a Change in the Price Level Affects Net Exports The impact of the price level on net exports is known as the international-trade effect . 5 Learning Objective 12.1 An important point to remember is that the aggregate demand curve tells us the relationship between the price level and the quantity of real GDP demanded, holding Shifts of the Aggregate Demand Curve versus Movements Along It everything else constant . 6
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2009-10-7 2 Learning Objective 12.1 • Changes in government policies The Variables That Shift the Aggregate Demand Curve The variables that cause the aggregate demand curve to shift fall into three categories: Changes in the expectations of households and firms Changes in foreign variables 7 Learning Objective 12.1 Monetary policy The actions the Federal Reserve takes to manage the money supply and interest rates to pursue The Variables That Shift the Aggregate Demand Curve Changes in Government Policies macroeconomic policy objectives.
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This note was uploaded on 02/22/2010 for the course FBE ECON1002 taught by Professor Rao during the Spring '10 term at HKU.

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CH12 - 2009-10-7 Learning Objective 12.1 Why Is the Aggregate Demand Curve Downward Sloping GDP has four components consumption(C investment(I

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