Chapter-5 extra

Chapter-5 extra - CHAPTER 5 Aggregate Demand and Aggregate...

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CHAPTER 5 Aggregate Demand and Aggregate Supply Chapter 5 develops the aggregate demand-aggregate supply model of the economy that will be used to analyze the material in coming chapters. It examines aggregate demand and short-run aggregate supply (and the AD and SRAS curves) and the factors that affect them. It shows how changes in these factors lead to changes in the price level, Real GDP, and the unemployment rate. Finally, it defines the two equilibrium states in an economy—short-run and long-run equilibrium—and uses the AD, SRAS, and long-run aggregate supply (LRAS) curves to depict these states. KEY IDEAS 1. The economy has two sides. One side is the aggregate demand side and the other is the aggregate supply side. 2. There is a difference between a change in the quantity demanded of Real GDP and a change in aggregate demand. 3. Interest rates are determined in the loanable funds market. 4. Most economists would say that a change in the money supply would shift the AD curve. 5. There is a difference between moving along a given SRAS curve and shifting to a new SRAS curve. 6. Economic forces will eliminate shortages and surpluses. 7. Real GDP and the unemployment rate are inversely related. 8. A change in a factor of AD or a factor of SRAS (or both) will change the point of market equilibrium in a predictable way. 9. Aggregate supply includes both short-run and long-run aggregates supply. CHAPTER OUTLINE I. THE TWO SIDES TO AN ECONOMY The two sides to an economy are the demand side and the supply side (called aggregate demand and aggregate supply.) Macroeconomists often use the AD-AS framework of analysis to discuss the price level, GDP, Real GDP, unemployment, economic growth, and other major macroeconomic topics. The AD-AS framework has three parts: AD, SRAS, and LRAS. II. AGGREGATE DEMAND Aggregate demand refers to the quantity demanded of (U.S.) Real GDP, at various price levels, ceteris paribus . There is an inverse relationship between the price level and the quantity demanded of Real GDP. An AD curve is the graphical representation of AD. 70
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71 Chapter 5 A. Why Does the Aggregate Demand Curve Slope Downward? The real balance effect explains the inverse relationship between the price level and the quantity demanded of Real GDP. The real balance effect states that the inverse relationship is established through changes in the value of monetary wealth. As the price level changes, the purchasing power of monetary wealth changes, causing the quantity demanded of Real GDP to change. B. A Change in the Quantity Demanded of Real GDP Versus a Change in Aggregate Demand There is a difference between a change in the quantity demanded of Real GDP and a change in aggregate demand. A change in the quantity demanded of Real GDP is brought about by a change in the price level and is shown by moving from one point on another point on an AD curve, while a change in AD is brought
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Chapter-5 extra - CHAPTER 5 Aggregate Demand and Aggregate...

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