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5 March 2013 Econ 202

4 pieces of ad consumption investment government net

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4 pieces of AD Consumption Investment Government Net Exports o AD = C + I + G + NX P = price level (all prices included) Q = real GDP = Y Reasons for negative slope o 1. Wealth effect – price increases reduce the real value of wealth  which reduces the quantity of AD Inverse relationship between price level and Q final goods and  services demanded; poorer in real terms; negative impact on  their wealth when prices go up Higher price level means lower quantity of aggregate demand Decline in the quantity of aggregate demand P goes up, real wealth goes down, quantity of aggregate  demand goes down Price goes down, real wealth goes up, quantity of aggregate  demand goes up
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o 2. Interest rate effect Market for loanable funds Savings depends on peoples wealth “Every dollar borrowed requires a dollar saved” o 3. International trade effect o
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03/06/2013 14:27:00
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03/06/2013 14:27:00
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