econ102 notes - Steve's Review Session for exam II: Chapter...

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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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