ECN 203 (13), Determining Aggregate Demand

ECN 203 (13), Determining Aggregate Demand - Chapter 13 -...

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Chapter 13 -- Determining Aggregate Demand (AD) This chapter -- looks at the components of Aggregate Expenditure. Examines the major causes of Consumption (C), Investment (I), Government Expenditure Net of Taxes (G - T), and Net Exports (X - M).
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“Unzipping” Aggregate Expenditure (AE) Causes of AD I. Price Level (P) II. AE = C + I + (G – T) + (X – M) (a) C (i) ----------------- (ii) ---------------- (b) I (i) ----------------- (ii) ---------------- (c) (G – T)
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Causes of Consumption (C) Aggregate Income (Y), Y C Wealth, Wealth C Consumer Confidence (CC), CC C
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Applying the Causes to Aggregate Demand (AD) Aggregate Income (Y), appears on the graph, Y C relationship affects the shape of the AD curve. Changes in Wealth or Consumer Confidence make up autonomous consumption (consumption due to causes other than Y) -- shift the AD curve.
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Consumer Confidence and the Economy Example -- effect of a decrease in consumer confidence. CC C Therefore the AD curve shifts leftward. In the AD-AS model, this results in Y* , P*
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Causes of Investment (I): The Capital Market Investment (I) – primarily business purchases of new plant and equipment. Also includes new residential housing and changes in inventories (small). Large expenditures create the need for long-term borrowing. Borrowing is done from banks (or similar loaning institutions), or by companies issuing bonds or stock.
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Investment and Capital Market Behavior Investment results from behavior in the (financial) capital market. The Capital Market -- The Demand and Supply for financial capital needed to finance purchases of plant and equipment and new residential housing (I).
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The Demand For Financial Capital (D I ) -- Major Causes Nominal (Long-Term) Interest Rate (r) – cost of borrowing to finance
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This note was uploaded on 06/16/2011 for the course ECON 203/101 taught by Professor Na during the Fall '09 term at University of North Carolina School of the Arts.

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ECN 203 (13), Determining Aggregate Demand - Chapter 13 -...

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