ECON 1BB3 Lecture Notes - Lecture 11: Aggregate Demand, Aggregate Supply, Interest Rate
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23 Feb 2016
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The ad curve has a negative slope for 3 reasons: wealth effect. People feel wealthier: consumption increases, therefore gdp increases (if c goes up in the equation, y will too, causes a movement along the curve, not a shift. 2 assets: money (no interest, bonds (interest) Opportunity cost of holding money is interest rate. People buy same quantity of goods as before, costs less o: need less money, money demanded shifts to the left (less money demanded) o o, gdp increases. Prices decrease ep/p* decreases because p decreases o: canadian goods become less expensive o. Imports decrease: exports increase, gdp increases (nx goes up therefore y will too ) Anything other than p that affects c, i, g or nx will cause the ad curve to shift. Lras (long run aggregate supply): y=a*f(k, l, h, n) Slope: a, k, l, h, n do not depend on price (recall the classical dichotomy the long run separation of real and nominal variables)
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