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Nov 19 note - how do aggregate demand and aggregate supply differ from demand and supply.docx

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Hannah Holmes

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How do aggregate demand and aggregate supply differ from demand and supply? (Ch 14, 15) 19/11/2008 Aggregate demand curve AD: Y = C + I + G + NX - TheAD curve has a negative slope for three reasons - The reason that theAD curve is different than other demand curve that we seen is because demand curve of a single good is negatively related to the price of that good - When the price of that good goes up, people substitute away from that good and start buying other less expensive goods - When we talk about theAD, we are talking about everything in the economy including important exports by including that NX term - When the general price goes up, there is nothing to substitute towards since we are already including everything that is produced in the world - These three reasons thatAD curve flows downward have to do with a change in the price level and how that affects C, I and NX 1) Wealth effect o Relationship between P and Y o P = Overall price level o Y = GDP o P down, people feel wealthier, C up, GDP up 2) Interest rate effect - New money market model - There are only 2 assets in this economy - Money no interest and bonds which pays a positive rate of interest - We need money because that’s what we use to buy goods and services r 1 How do aggregate demand and aggregate supply differ from demand and supply? (Ch 14, 15) 19/11/2008 Ms Md M - P down - We purchase the same quantity of goods as before - We have money left over - We decide to buy bonds which pays interest - Firms will be able to get more money for investment - Shift the money demand curve to the left - I up, Y up 3) Real exchange rate effect o P down, domestic goods are less expensive; we decide to buy more Canadian goods and less import. o Foreigners buy more Canadian goods so export goes up o NX up, Y go up Shift factors for theAD curve Anything other tha
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