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Chapter 10 - Chapter 10 Aggregate Demand and Aggregate...

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Chapter 10- Aggregate Demand and Aggregate Supply Aggregate Demand- a schedule or curve that shows the amounts of real output that buyers collectively desire to purchase at each possible Price Level (as measured by the GDP price index) - There is an inverse relation between the price level and the real GDP demanded. Real Balances Effect- a higher price level reduces the purchasing power (real value) of the public’s accumulated assets. Interest Rate Effect- a higher price level increases the demand for money (need more money for purchases). Given a fixed supply of money, the increase in demand for money results in an increase in the interest rate (price of money). Higher interest rates result in less investment and interest sensitive consumer spending. Foreign Purchases Effect- when U.S. prices increase relative to foreign prices (and exchange rates do not adjust quickly or completely), foreigners buy fewer U.S. products and Americans by more foreign products. Determinants of Aggregate Demand - all else equal, a change in the price level will change the amount of aggregate spending and, therefore, the quantity of real GDP demanded in the economy (moving along an Aggregate Demand curve) A change in Aggregate Demand (shift in the Aggregate Demand curve) involves two components: 1. A change in one the components of Aggregate Demand
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