ec-4 - Chapter 12: Aggregate Demand and Aggregate Supply...

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Chapter 12: Aggregate Demand and Aggregate Supply Analysis After studying this chapter, you should be able to: Discuss the determinants of aggregate demand, and distinguish between a movement along the aggregate demand curve and a shift of the curve. Discuss the determinants of aggregate supply, and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve. Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium. Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions. Aggregate Demand Price Level RGDP Aggregate Supply Price level affects on the economy Aggregate demand (AD) curve indicates equilibrium GDP at each price level. The quantity of real GDP is that demanded by households, firms, and the government. If price level changes this causes a movement on the AD curve. The aggregate demand curve is downward sloping because a fall in the price level increases the quantity of real GDP demanded. Let’s look at three reasons for this shape. 1) The Wealth Effect explains how a change in the price level affects consumption. As the real value of wealth changes with changes in price level people adjust the amount of their current consumption. Increase in wealth leads to increase in consumption. Recall the reason for the aggregate savings curve to shift with changes in wealth. This will lead to a new level (or quantity) of consumption. 1
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2) The Interest-Rate Effect explains how a change in the price level affects investment. If price level increase then People will desire to hold more money for transactions which will effect the interest rate for loans and bonds. (We will discuss this in detail in chapter 14)
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ec-4 - Chapter 12: Aggregate Demand and Aggregate Supply...

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