Chapter 12 - chapter: 12 AggregateDemandand >...

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1 of 58 chapter: 12 >> Aggregate Demand and  Aggregate Supply
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2 of 58 WHAT YOU WILL LEARN IN THIS CHAPTER How the aggregate demand curve illustrates the relationship between the aggregate price level and the quantity of aggregate output demanded in the economy How the aggregate supply curve illustrates the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy Why the aggregate supply curve in the short run is different from the aggregate supply curve in the long run
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3 of 58 WHAT YOU WILL LEARN IN THIS CHAPTER How the AS–AD model is used to analyze economic fluctuations How monetary policy and fiscal policy can stabilize the economy
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4 of 58 Aggregate Demand The aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government and the rest of the world.
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5 of 58 8.9 1933 0 636 Real GDP (billions of 2000 dollars ) Aggregate price level (GDP deflator, 2000 = 100) Aggregate demand curve, AD A movement down the AD curve leads to a lower aggregate price level and higher aggregate output. 950 5.0 The Aggregate Demand Curve
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6 of 58 It is downward-sloping for two reasons: The first is the wealth effect of a change in the aggregate price level —a higher aggregate price level reduces the purchasing power of households’ wealth and reduces consumer spending. The second is the interest rate effect of a change in aggregate the price level —a higher aggregate price level reduces the purchasing power of households’ money holdings, leading to a rise in interest rates and a fall in investment spending and consumer spending. The Aggregate Demand Curve
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7 of 58 Y 1 E 1 AE Planned AE Planned 1 Planned aggregate s pending 45-degree line Real GDP Y 2 E 2 AE Planned AE Planned 2 The Aggregate Demand Curve and the Income- Expenditure Model
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8 of 58 Y 1 AD P 1 Real GDP Real GDP Planned aggregate s pending Aggregate price level AE Planned AE Planned 1 45-degree line E 1 (a) Change in Income– Expenditure Equilibrium (b) Aggregate Demand Y 1 AE Planned 2 E 2 Y 2 P 2 Y 2 The Aggregate Demand Curve and the Income- Expenditure Model
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9 of 58 Shifts of the Aggregate Demand Curve The aggregate demand curve shifts because of: changes in expectations wealth the stock of physical capital government policies fiscal policy monetary policy
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10 of 58 AD 1 AD 1 AD 2 AD 2 Real GDP Real GDP Aggregat e price level (a) Rightward Shift (b) Leftward Shift Aggregat e price level Shifts of the Aggregate Demand Curve Increase in aggregate demand Decrease in aggregate demand
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11 of 58 Factors that Shifts the Aggregate Demand Curve Changes in expectations If consumers and firms become more optimistic, . . . . . . aggregate demand increases. If consumers and firms become more pessimistic, . . . . . . aggregate demand decreases.
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This note was uploaded on 12/20/2011 for the course ECON 2006 taught by Professor Rdcothren during the Fall '08 term at Virginia Tech.

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Chapter 12 - chapter: 12 AggregateDemandand >...

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