Chapter10 - Chapter 10 Aggregate Demand and Supply CHAPTER...

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Chapter 10 Aggregate Demand and Supply CHAPTER SUMMARY Aggregate demand and supply analysis enables us to predict the impact of a change in either aggregate demand or supply upon the level of economic activity and the price level. Equilibrium is determined at the point of intersection between the two curves. The aggregate demand (AD) curve shows the level of real GDP purchased in the economy at different price levels during a period of time. The AD curve slopes downward because of: 1) the real balances or wealth effect; 2) the real interest-rate effect; and 3) the net exports effect. The aggregate supply (AS) curve shows the level of real GDP that businesses will supply at different price levels. The shape of the AS curve depends upon the flexibility of prices and wages as real GDP expands or contracts. The three ranges of the AS curve are: 1) the Keynesian range; 2) the intermediate range; and 3) the classical range. Cost-push inflation is expressed as an increase in inflation due to a decrease in AS. This leftward shift of the AS curve (a decrease in AS) results in not only cost-push inflation but stagflation as well. An increase in aggregate demand causes demand-pull inflation. AD and AS can change due to a number of factors. Generally anything which causes an increase in aggregate expenditures (total spending) causes an increase in AD (a rightward shift). Whereas, anything which increases the cost of production shifts the AS curve to the left. NEW CONCEPTS INTRODUCED
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Chapter10 - Chapter 10 Aggregate Demand and Supply CHAPTER...

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