Chapter%2012%20(without%20Chap%2011)%20PPT%20Student%20(2%20slides%20per%20page)[1]

Chapter%2012%20(without%20Chap%2011)%20PPT%20Student%20(2%20slides%20per%20page)[1]

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8/25/2010 1 Chapter 12 Aggregate Demand and Aggregate Demand and Aggregate Supply Analysis In this lecture we begin to develop our most important macroeconomic model – the Aggregate Demand and Aggregate Supply model. Ultimately we’ll have 2 aggregate supply curves one that applies to the Ultimately we ll have 2 aggregate supply curves, one that applies to the short-run (the SRAS curve) and one that applies to the long-run (the LRAS curve). There is one aggregate demand curve (the AD curve). Aggregate Demand shows the relationship between the price level and the quantity of real GDP demanded by households, firms, the government, and foreign entities.
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8/25/2010 2 The Aggregate Demand (AD) Curve What happens to aggregate demand when prices change? There is an inverse relationship between prices and aggregate demand. This means that the AD curve has a negative slope . Why? ± P decreases the real value of household wealth ± P makes US goods more expensive relative to goods produced in other countries ± P causes interest rates to rise (more on this later), which causes Price Level Real GDP
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8/25/2010 3 Variables that shift the AD Curve Changes in Government Policies ± Monetary Policy (actions by the Federal Reserve concerning money supply and interest rates) ² e g int rates => I and C => AD e.g. int. rates => I and C => ± Fiscal Policy (actions by the President and Congress concerning the level of government spending and taxes) ± Taxes ² e.g. personal income taxes => C => AD ² e.g. business taxes => I => AD ± Government Spending ² e.g. G => AD Changes in Household and Firm Expectations ± Households’ Expectations ² If households become pessimistic about their future incomes, then current consumption spending will => AD ± Firms’ Expectations ² If firms become optimistic about the future profitability of investment spending, then current investment spending will => AD
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8/25/2010 4 Real Investment Spending (1979-2009) Changes in Household Wealth and Disposable Income ± Household Wealth Wealth => C => AD ± Disposable Income (“after-tax income”) Disposable Income => C => AD Changes in Foreign Variables
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Chapter%2012%20(without%20Chap%2011)%20PPT%20Student%20(2%20slides%20per%20page)[1]

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