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ECN 204 (348)

macro part 2.docx

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ECN 204
Khyati Antani

Aggregate demand is the overall demand in an economy at different price levels Four types of demand 1 Household demand 2 Business demand 3 Foreign demand 4 Government demandWhy is the AD curve downwards sloppingWealth effect The higher the prices real income decreases and people feel poorer so AD goes downTrade effect The higher the prices the lower the exports and therefore lower ADRoi effect the higher the prices the higher the roi which means lower AD Other factors effecting ADFactor Increase AD Decreases AD Future expectations Optimistic PessimisticExchange rate Depreciating AppreciatingFiscal policyInc G and lower TLower G inc TMonetary policyLower roi Inc roiThis factors shift the graph For any increase in AD the smaller the increase in real output the greater is the increase in price levelAggregate supplyAS is the overall ability of products in an economy at different price levelsAS is upward slopping and becomes steeper and steeper as the economy grows When AS becomes vertical that means we are all out of resources so we cannot produce more Other factors effecting AS1 Cost of resources2 Availability of resources3 Better technology4 Weather5 Taxes and government regulations6 Future expectations Increase in ADInflationary Gap when equilibrium GDP exceeds potential GDP
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