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Lecture 2

ECON15269G-CO4 Lecture Notes - Lecture 2: General Idea, Market Power, Aggregate Demand

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1. Define aggregate demand and aggregate supply.
Aggregate demand:
Its defined as the curve or schedules that shows the total demand for all the
good and services produced at a given point of time. It determines the amount
of all these goods and services that will be purchased at all possible prices.
Aggregate supply:
Its a schedule or curve that shows all levels of real output produced at all
levels of possible prices.
2. Why does the aggregate demand curve slopes downward?
wealth effect:
if all things are equal, as prices go down GDP will expand. There fore, when
prices go down, people think they have more money than before and they think
they are wealthier.
Interest rate and savings effect:
If all other things are equal and if prices decreased by half their price, people
will be able to spend less and save more.
When people save money they tend to deposit in savings accounts. So when
prices are low, savings increase and so does the supply of money and money
lending. So if money lending increases because there's more supply of money,
interest rates go down. So now people will borrow more money and make
investments as interest rates are cheaper. This stimulates investment and
this will cause economy to expand.
Foreign exchange effect:
If prices are low, interest rates go down and there's more borrowing. When
this happens, investors say that i have low interest rates only in my country.
So if i can convert this money into any foreign currency, i can get higher
interest rates on my savings. Therefore if interest rates go down, people
convert out of the currency. Therefore if the us dollar goes down, people
outside the country will find USA products cheaper. Thereby, buying more US
products which increases the country's GDP.
3. State the determinants of the aggregate demand curve’s location, and explain
how the curve will shift when one of these determinants changes.
Things that constitute GDP
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