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Unformatted text preview: 708 PART TWELVE SHORT-RUN ECONOMIC FLUCTUATIONS Y C I G NX. Each of these four components contributes to the aggregate demand for goods and services. For now, we assume that government spending is fixed by policy. The other three components of spending—consumption, investment, and net ex- ports—depend on economic conditions and, in particular, on the price level. To un- derstand the downward slope of the aggregate-demand curve, therefore, we must examine how the price level affects the quantity of goods and services demanded for consumption, investment, and net exports. The Price Level and Consumption: The Wealth Effect Con- sider the money that you hold in your wallet and your bank account. The nominal value of this money is fixed, but its real value is not. When prices fall, these dollars are more valuable because then they can be used to buy more goods and services. Thus, a decrease in the price level makes consumers feel more wealthy, which in turn en- courages them to spend more. The increase in consumer spending means a larger quantitycourages them to spend more....
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.
- Spring '10