ECN 204 Lecture : ECN204 Chapter 14.doc
22 Apr 2012
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The classical dichotomy, the separation of variables into two groups: real quantities, relative prices, nominal measured in terms of money. The aggregate demand curve shows the quantity of goods and services that households, firms, and the government want to buy at each price level. The dollars people how buy fewer goods and services so real wealth is lower. Result: c falls: the interest-rate effect (p and i, suppose p rises. Buying goods and services requires more dollars. To get these dollars, people borrow more. Result: i falls: recall, i depends negatively on interest rates, the exchange-rate effect (p and nx, suppose p rises. Real exchange rate = e x p / p* Canadian exports more expensive to people abroad, imports: an increase in p reduces the quantity of goods and services demanded cheaper to canadian residents. Result: nx falls: the slope of the ad curve: summary because: Investment tax credit or other tax incentives: changes in g.
