Steve’s Review Session for exam II: Chapter 13: • The goal of chapter 13 is to explain the equilibrium price level. • So the chapter introduces the aggregate demand and supply model to explain the equilibrium price level – that’s the goal of this chapter. • The aggregate demand is defined as the total demand for goods and services in the economy. • Know the derivation of the aggregate demand curve. • There’s two ways to think about the derivation of this curve. • The curve tells you the relationship between the overall price level and real gdp. • When the overall price level increases, people need more money to conduct transactions. o That’s the linkage between the money market and the goods market. • So when overall price level increases, demand for money increases. When the demand for money increases, the interest rate increases, which makes investment go down, and therefore output goes down. • The above bullet point is how the aggregate demand curve is derived.
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