Aggregate Demand and Aggregate Supply Analysis

Aggregate Demand and Aggregate Supply Analysis - price...

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Aggregate Demand and Aggregate Supply Analysis From Last Time How is the expected rate of inflation determined? According to the rational expectations hypothesis, people use all available information in forming their expectation of the inflation rate. This includes all past information, current information, and what they think might happen in the future. They run all this information through their (correct to a random error term) model of the economy, and out pops an expected inflation rate. Aggregate Demand Curve Aggregate Demand (AD) is total spending in the economy at different price levels. AD = C + I + G + NX. The AD curve is downward sloping just like the demand curve for apples but the reason is different. While market quantities respond to relative prices, aggregate quantities respond to
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Unformatted text preview: price level changes. a rise in the price level causes AD to fall because the real money stock falls, causing interest rates to rise. The higher interest rate has two effects on spending: 1. investment and consumption spending fall 2. the foreign exchange value of the dollar rises so net exports fall The aggregate demand curve shows combinations of the price level (p) and real output (Y) at which the goods and asset markets are both in equilibrium. shifts of AD curve: 1. changes in nominal MS 2. changes in MD (not as a result of a change in income) 3. expected future income 4. government spending and tax cuts/increases 5. expected future profitability of capital 6. business taxes...
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