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Lecture

Economics Chapter 23 Summary.docx

4 Pages
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Department
Economics (Arts)
Course Code
ECON 209
Professor
Mayssun El- Attar Vilalta

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Economics Chapter 23 Exogenous Changes in the Price Level - AE curve shifts in response to change in price level; occurs b/c change in price level affects desired consumption and desired net exports Changes in Consumption - Changes in price level lead to changes in household wealth and thus changes in desired spending - What money can buy—its real value—depends on price level - Rise in price level lowers the real value of money; reduction in price level raises value of money - Change in price level change wealth of bondholders and bond issues but b/c changes offset each other there is no change in aggregate wealth - A decrease in wealth leads to decrease in desired consumption and downward shift in AE Change in Net Exports - When price level rises and exchange rate remains unchanged, Canadian goods become more expensive relative to foreign goods which causes a decrease in exports and increase in imports - Rise in price level shifts net export function downward which shifts AE curve down - Fall in price level shifts net ex[ort up and AE up also Changes in Equilibrium GDP - When AE shifts down, equilibrium of real GDP falls A change of Labels - Changing y-axis from actual national income to real GDP—exact same meaning The Aggregate Demand Curve - Price level and real equilibrium GDP are negatively related to each other so we can form the aggregate demand curve out of this - Before price was set, now we let price vary and plot given price levels at various points to construct the aggregate demand (AD) curve—shows relationship between price level and equilibrium level of real GDP - AE and 45 degree line are plotted above AD curve so it can be plotted accordingly - Price level is y axis and real GDP is x axis - A rise in price level causes AE to shift down, a movement upward and to the left along AD curve reflecting a fall in equilibrium level of GDP - Fall in price levels causes AE to shift upward and leads to movement down and right along AD curve - Fall in price level leads to rise in private-sector wealth which increases desired consumption and leads to an increase in equilibrium GDP - A fall in price level leads to a rise in net exports and leads to an increase in equilibrium GDP - Price level goes down, people become relatively richer which increase their consumption which pushes up the AD curve Shifts in the AD curve - Shifts are caused by any event leading to a change in the equilibrium GDP other than price level - Aggregate demand shock: a shift in AD curve - For a given price level, an increase in autonomous aggregate expenditure (gov’t purchase/taxation, consumption, investment, foreign demand for exports) shifts AE curve upward and AD curve to the right. A fall in autonomous aggregate expenditure shifts AE down and AD left The Simple Multiplier of the AD Curve - Simple multiplier measures size of change in equilibrium national income in response to change in autonomous expenditure when price level is held constant; so it also measures size of horizontal shift in the AD curve in response to change in autonomous desired expenditure - If price level is constant and producers supply everything demanded, the simple multiplier also shows the change in equilibrium income that will occur in response to change in autonomous expenditure 23.3 The Supply Side of the Economy The Aggregate Supply Curve - Curve showing the relation between the price level and the quantity of aggregate output supplied for given technology and factor prices The Positive Slope of the AS curve Costs and Output - Unit cost: cost per unit of output equal to total cost divided by total output - Unit cost rises as output rises b/c less efficient plants must be used, less efficient workers have to be hired and existing workers have to be paid more—law of diminishing returns Prices and Output - Price takers: when there’s a lot of small firms who can’t influence market price & must accept price is set by market, when market price changes firms will react by altering level of production - If unit costs rise with output, price taking firms will produce more only if price increases and will produce less if price falls - Price setter: less firms in market, differentiated product that can still be called under one type (like cars) and they have influence over the market price. Will increase price when they expand output into range where unit costs rise and will decrease price if reduction in output lead to reduction in unit cost The increasing slope of the AS Curve - AS curve starts off flat and slowly gets very steep - When output is low (below potential output) firms have excess capacity (plant and equipment are idle), only a small increase in price of their output is needed to induce expansion of production; now output is demand determined up to level at which costs begin to rise - Once output is pushed above normal capacity, cost rises rapidly; higher cost production must be adopted, the more output the more costs rise and larger is rise in price necessary to induce firms to increase output - Increasing slope of AS curve is first asymmetry in behaviour of aggregate supply Shifts in the Aggregate Supply Curve - Anything that changes firms’ production costs cause AS curve to shift -
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