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(NOTESWAP) Ch 25 and 31 Notes-1

(NOTESWAP) Ch 25 and 31 Notes-1 - Chapter 25 Practice...

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Chapter 25 Practice Problems: 3-7, 9-11, 13, 15, 16, 18, 19 A. Aggregate Demand- This is what causes expansions, recessions, prices changes, etc. Look at notes. 1. Expenditure approach, national income accounting: This is the buying side. a. Foundation y= C + I + G + X – IM C= Consumption: Individuals purchasing newly produced goods in the U.S. I= Investment: Businesses purchasing new things; new housing; etc. G= Government spending: This is government spending. X= Exports: Foreign individuals purchasing goods and services produced in the U.S. IM= Imports: This is the U.S. purchasing good produces outside of the U.S. b. Determinants of quantity of real GDP demanded: We are trying to explain what a falling aggregate price levels will translate into people, businesses, foreign places, willing and able to purchase at different prices. Also look at notes. Real wealth effect -If aggregate price level goes down, GDP will go up. As the price of goods and prices goes down, nominal level will stay the same. The real value of the item though as gone up. The real value is the nominal value/ the price of things. Even though nominal doesn’t change, as the prices go down, the real value will go up. This is more consumption, investment, more GDP. Interest rate effect - If aggregate price level goes down nominal interest rates will go down (so borrowing becomes cheaper), which means people will borrow more. This means people will want to buy more if they can borrow more. So GDP increases again. Exchange rate effect -If aggregate price level goes down, nominal interest rates going down will cause the price of the U.S. dollar in other countries to go down. This means that every U.S. dollar you have will purchase fewer units of a foreign currency. This means that the goods and services produced abroad are becoming more expensive. This also means that more foreign countries will buy more of our products; exports. This will all make GDP increase.
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c. Determinants of aggregate demand: There are a few things that will cause aggregate demand to increase or decrease. Monetary policy: In the U.S. monetary policy is controlled by an institution called the Fed (the Central Bank of the U.S.). Monetary policy is the changes in supply and the changes in the interest rate; all controlled by the Fed. a. Expansionary (+) : If the Fed pursues an expansion policy; aggregate demand will increase. Notes; this is an increase in the money supply or a decrease in interest rates. The more money we have; the more willing and able we are to buy. This is the same as reducing interest rates; making things cheaper. b. Contractionary (-) : This is reducing the money supply or increasing interest rates. This will cause aggregate demand to decrease; people are less willing and able to buy. People and businesses will spend less money.
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