Basic Economics Aggregate Demand and Aggregate Supply

Basic Economics Aggregate Demand and Aggregate Supply -...

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 Aggregate Demand and Aggregate  Supply Aggregate Demand We want to develop a model of the economy that will let us address issues such as what causes a recession and what are sources of inflation. The model will look at demand and supply for the economy as a whole. Aggregate demand is the total amount of spending at each possible price level. Aggregate demand is equal to consumption spending + investment spending + government spending on goods and services + exports - imports. The aggregate demand curve is downward sloping: 1. real balances effect - a fall in the price level increase the purchasing power of consumers' wealth so consumption spending rises 2. foreign purchases effect - a fall in the price level makes domestic goods relatively cheaper compared to foreign goods so imports fall and exports rise 3. interest rate effect - a fall in the price level reduces the inflation rate so interest rates fall, meaning that any spending that is interest rate sensitive such as consumption and
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