chap 18 - Chapter 18 Framework for Macroeconomic Analysis...

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Chapter 18 Framework for Macroeconomic Analysis: Aggregate Demand and Aggregate Supply Curves
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Relationship between output and prices in the macroeconomy t Equation of exchange: MV = PY t P = price level t Y = real GDP Relationship between P and Y
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Aggregate demand t Aggregate demand (AD) = summarizes relationship between price level and real GDP demanded based on analysis of output, financial, and foreign exchange markets t AD = C d + I d + G d + X d - Z d
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Slope of aggregate demand t AD has a negative slope t Explanations for negative slope t 1) “net exports effect” t Higher price level increases the cost of U.S. goods to the rest of the world t Exports fall and imports rise, so quantity of real GDP demanded falls t 2) “interest rate effect” t Higher price level increases the amount of money it takes to purchase goods and services t With a given level of income, that implies savings decreases t Supply of loanable funds decreases t i b C d + I d + (X d - Z d ) b quantity of real GDP demanded
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Slope of aggregate demand, continued t 3) “wealth effect” or “real balance effect” t A higher price level reduces the urchasing power of money purchasing power of money t Decrease in the “real” value of wealth reduces consumption spending and thereby reduces the quantity of real GDP demanded
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Graph of aggregate demand P AD Y(real GDP)
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