Chapter 12 Summary:- The aggregate demand curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded.- The aggregate demand curve 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 that reduces the purchasing power of households’ wealth and reduces consumer spending. The second is the interest rate effect of a change in the aggregate price level – a higher aggregate price level reduces the purchasing power of households’ and firms’ money holdings, leading to a rise in interest rates and a fall in investment spending and consumer spending.- The aggregate demand curve shifts because of changes in expectations, changes in wealth not due to changes in the aggregate price level, and the effect of the size of the existing stock of physical capital. Policy makers can use fiscal policy and monetary policy to shift the aggregate demand curve. - The aggregate supply curve shows the relationship between the aggregate price level and the quantity of
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