Exam 3 CS

Exam 3 CS - NOTES: Aggregate demand graphically illustrates...

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NOTES : Aggregate demand – graphically illustrates the inverse relationship between the price level and the quantity of goods demanded through the economy. AD = C + I + G + (X-M). Reasons for a downward sloping AD demand curve – wealth effect: decreasing the price level increases the purchasing power. Interest rate effect: decreasing the price level increases the real money supply which lowers interest rate and increases investments. Intertemporal price level effect: price level falls and is expected to rise in the future. International effect: decreasing the price level makes domestic goods cheaper relative to foreign goods. Real (MS) = nominal (MS)/ Price Level. i = interest rate. Increasing consumption increases aggregate demand. Aggregate demand shift factors – Income: increasing income will increase consumption. Expectations: higher expected future prices will increase current consumption. Interest Rates: lower interest rates will increase consumption and investments. Distribution of income. Aggregate Supply - graphically illustrates the relationship between the price level and the quantity of goods supplied throughout the economy. Y = output income, y* = full employment. Reasons for a upward sloping short run aggregate supply curve - constant input prices: if the prices level rises firms receive more money for their goods and if input price are constant firms will have higher profits. Reasons for a vertical long run aggregate supply curve - in the long run input prices have time to adjust. SRAS shift factors - expectations: if supplies expect aggregate demand to be low they will reduce supply. Wage price ratio: when wages are low relative to prices firms have a desire to produce a lot. LRAS shift factors – available inputs: ↑# of inputs ↑LRAS. Institutional environments: ↓ regulation LRAS. Technology: improve technology ↑ LRAS. Keynes vs Classical – K (activist, modern day democrats. Believed the government can impact the economy. The price, wages, interest rates were sticky, and workers will resist price cuts, causing recession. Short run focused, increase government spending. Build roads and dams. “in the long run, we’re all dead”.) C(modern day republicans, Laissez-faire(leave the market alone) economist believed that most government policies would make things worse. The market is self adjusting; wages prices and interest rates are flexible. In the short run there may be problems. Focus is on the long run. Unemployment results when the real
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Exam 3 CS - NOTES: Aggregate demand graphically illustrates...

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