Lecture 14 - ECO100 - Gustavo Indart Slide 1 ECO 100Y ECO...

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Unformatted text preview: Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 14: Lecture 14: Aggregate Demand and Aggregate Demand and Aggregate Supply Aggregate Supply Gustavo Indart Slide 2 The Price Level and Aggregate The Price Level and Aggregate Expenditure Expenditure An increase in the price level (P) shifts the AE curve downward A decrease in the price level (P) shifts the AE curve upward This shift of the AE curve is due to the effect of changes in P on consumption (C) and net exports (NX) Gustavo Indart Slide 3 Wealth and the Consumption Wealth and the Consumption Function Function According to the Life-Cycle theory of consumption Households save in order to accumulate wealth that they can use during their retirement An unexpected rise in wealth would shift the consumption curve up (and the saving curve down) That is, less will be needed to be saved for retirement Gustavo Indart Slide 4 Changes in P and the Changes in P and the Consumption Function Consumption Function Changes in P affect C through their impact on real wealth An increase in P lowers real wealth Reduces the real value of money Bondholders perception of their wealth also decreases Gustavo Indart Slide 5 Shifts of the Consumption and Shifts of the Consumption and Saving Functions Saving Functions C C An increase in P decrease real wealth, thus causing the S curve to shift up and the C curve to shift down. S C YD 1 YD YD At each level of YD households will need to save more for retirement. S S YD Gustavo Indart Slide 6 The Effect of an Increase in P The Effect of an Increase in P on the AE Curve on the AE Curve C C An increase in P decrease real wealth, thus causing savings to increase and autonomous consumption to decrease....
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Lecture 14 - ECO100 - Gustavo Indart Slide 1 ECO 100Y ECO...

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