MGEB06H3 Lecture Notes - Lecture 6: Price Level, Aggregate Demand, Demand Curve
Macroeconomics Notes: Lecture Six/Seven (Chapter Twelve) Part One:
Aggregate Demand (AD):
• This shows the relationship between the aggregate price level and the quantity o
aggregate output demanded by household’s business the government and the rest of the
world.
• Holding everything constant, there’s an inverse relationship between the aggregate price
level (P) and the quantity of aggregate output demanded.
Why Is the Aggregate Demand Curve Downward Sloping?
• GDP = Y = C + I + G + X – IM
• The demand curve for individual goods shows how the quantity demanded depends on
the price of that good.
• The quantity demand falls when the price of that good rises.
• In macroeconomics, we look at the demand for ALL goods and services.
If all prices, including prices of labour & capital, increase, then dollar incomes also
increase.
If both incomes and prices increase at the same rate, there is no change in real income =
there should be no change in aggregate demand.
A downward sloping AD curve can be explained by the wealth effect and the interest rate
effect.
The Wealth Effect of an Aggregate Price Level Change:
• This is the effect on consumer spending caused by the effect of a change in the aggregate
price level on the purchasing power of consumer’s assets.
• Holding all else constant, a rise in price lowers the real value of existing assets real value
of wealth .
• When P , wealth (autonomous) C (Chapters 10 & 11) AD .
The Interest Rate Effect of an Aggregate Price Level Change:
• This is the effect on consumer spending and investment spending caused by the effect of a
change in the aggregate price level on the purchasing power of consumer and firms money
holding.
• When interest rate , cost of borrowing investment . (Chs 10 & 11)
• When interest rate , current consumption become more expensive consumption .
(Chapter 10)
• An open economy will also experience (net) capital inflows when interest rate domestic
currency appreciates X & IM NX . (Ch 19)
• In conclusion, C , I & NX when price AD .
The Aggregate Demand Curve and the Income-Expenditure Model:
• To derive the AD curve from the income-expenditure model, we need to take the effect of a
price change on planned aggregate expenditure into account:
Along an AEPlanned line, we hold the aggregate price level fixed.
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Document Summary
Macroeconomics notes: lecture six/seven (chapter twelve) part one: In macroeconomics, we look at the demand for all goods and services. If all prices, including prices of labour & capital, increase, then dollar incomes also. If both incomes and prices increase at the same rate, there is no change in real income = There should be no change in aggregate demand. increase. (cid:3005)(cid:3042)(cid:3039)(cid:3039) (cid:3041)(cid:3042)(cid:3040) effect. A downward sloping ad curve can be explained by the wealth effect and the interest rate. In conclusion, c , i & nx when price ad . The aggregate demand curve and the income-expenditure model: to derive the ad curve from the income-expenditure model, we need to take the effect of a price change on planned aggregate expenditure into account: Along an aeplanned line, we hold the aggregate price level fixed. The aeplanned will shift when there is a change in p. Equate aeplanned(p) to y (i. e. , set aeplanned(p) = y).