Aggregate Demand

Aggregate Demand - Extending the demand-supply framework to...

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“Through the so called wealth effect, recent stock market gains have tended to foster increases in aggregate demand beyond the increases in supply. It is this imbalance that contains the potential seeds of rising inflationary pressures that could undermine the current expansion. Our goal is to extend the expansion by containing its imbalances and avoiding the very recession that would complete the business cycle.” -Alan Greenspan, January 13, 2000 Extending the demand-supply framework to the economy as a whole: Aggregate Demand – Aggregate Supply Model Last two US recessions: Recession of 2001: Decline in the Aggregate Demand Recession of 2007-2010: Decline in the Aggregate Demand
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Stock Market and the Wealth Effect WFE - YTD Monthly May June July August September October November December NASDAQ OMX 3,483,629.7 3,174,512.3 3,230,774.5 3,300,155.9 2,903,915.5 2,453,577.8 2,180,838.4 2,248,976.5 NYSE Euronext (US) 15,071,483.3 14,413,303.1 13,418,169.4 13,567,084.6 13,045,902.7 10,312,695.0 9,169,946.8 9,208,934.1 Total 56,911,591.1 52,519,954.9 50,338,918.6 48,634,575.2 42,559,050.2 33,528,240.4 31,131,277.9 32,400,134.7 Americas Exchange 2008 How do such fluctuations in wealth effect the economy? Can the effects be modeled and understood?
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Aggregate Demand Demand for domestically produced goods and services aggregate across all sectors of the economy (the demand for the Real GDP) AD = C + I + G + x – m U.S. Department of Commerce. Bureau of Economic Analysis - Real GDP
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Constructing AD Framework: Any Demand Aggregate Demand Quantity of the product Real Output (Real GDP) Price of the product Price Level Quantity = f (price, other factors) U.S. Department of Commerce. Bureau of Economic Analysis - Price Level
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Slope: Constructing AD continued Any Demand Aggregate Demand Income Effect
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Aggregate Demand - Extending the demand-supply framework to...

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