# AD - PRINCIPLES OF MACROECONOMICS AGGREGATE DEMAND Foster...

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PRINCIPLES OF MACROECONOMICS AGGREGATE DEMAND Foster

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2 The Model of Aggregate Demand & Aggregate Supply P Y AD SRAS P 1 Y 1 The price level Real GDP, the quantity of output The model determines the equil. price level and equil. output (real GDP).
3 The Aggregate-Demand (AD) Curve The AD curve shows the quantity of all goods & services demanded in the economy at any given price level. Y = C + I + G + NX Assume G fixed by government policy. P Y AD P 1 Y 1 P 2 Y 2

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4 Why does the AD Curve Slope Downward? To understand the slope of AD , we must determine how a change in P affects C , I , and NX . P Y AD P 1 Y 1 P 2 Y 2
5 1) The Wealth Effect (P and C ) Suppose P rises. The dollars people hold buy fewer goods & services, so real wealth is lower. People feel poorer. As a result: C falls. And the opposite holds when P falls.

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6 2) The Interest-Rate Effect (P and I ) Suppose P rises. Buying goods & services requires more dollars. To get these dollars, people sell bonds or other
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## This note was uploaded on 02/28/2011 for the course ECON 011 taught by Professor Yezer during the Spring '07 term at GWU.

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AD - PRINCIPLES OF MACROECONOMICS AGGREGATE DEMAND Foster...

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