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Lecture

Aggregat demand SR

5 Pages
108 Views

Department
Economics
Course Code
ECO100Y1
Professor
Jack Carr

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Aggregate Demand/ Supply in
Short run
Relationship btw Price Level and GDP most important in Macro
Derive AD from impact on AE of changes in Price Level then examine short
and long-run AS and EQB
Aggregate Demand
Relationship btw price lvl and EQB GDP
oSimply AE in eqb with a price variable
P lvl decreases eqb GDP and vice versa but does not change AD
Derivation:
oFrom effect of Price changes on components (C, I, and X-IM) of AE. Ignore Gov
spending due to its political motivation
Consumption (Wealth affect)
P lvl causes fixed wealth thus an increase in P lvl decreases 
Autonomous Consumption at given levels of income
P lvl causes C shift down, vice versa
Investment (Intersect effect)
P lvl increases Money Demand by increasing Nominal income. The
increase in Money Demand increases interest rate which dicreases
real investment
Inversely related to P lvl
Net Exports (Relative Price affect)
domestic P implies increase in domestic P relative to foreign P
oTherefore lower competitiveness of exports and greater
competitiveness of imports. Net exports fall ( IM, X) 
Inversely related to P lvl
www.notesolution.com
oP lvl inversely related to AE through all non-gov components therefore AD
is downward sloping
oAE will have P variable attatched to it thus AD is only the eqb AE at each P lvl
oGraphically deriving AD:
Shifts in AD
oAn increase in in Autonomous Spending causes shifts right/left of AD by the
change in Autonomous spending times the multiplier (A/1-MPE)
oAE = A0 + cP + eY (A0 cP = A?!)
oAD fn for eqb Y is Y = (A0 + cP + eY)/ (1 e)
oWith Autonomous Spending, new AD fn:
Y = (A0 + A + cP + eY)/ (1 e)
Change in AD = A/ (1 e) Y intercept shifts vertically
by this
Aggregate Supply
Relationship btw Price lvl and Q of GDP(Y) supplied (LR/SR)
Long run AS period in which all Ps are variable, includes factor (input) prices
Short run AS period in which factor (input) prices are fixed but other prices are
variable
Long run AS (given full P adj.)
www.notesolution.com

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Description
Aggregate Demand Supply in Short run Relationship btw Price Level and GDP most important in Macro Derive AD from impact on AE of changes in Price Level then examine short and long-run AS and EQB Aggregate Demand Relationship btw price lvl and EQB GDP o Simply AE in eqb with a price variable P lvl decreases eqb GDP and vice versa but does not change AD Derivation: o From effect of Price changes on components (C, I, and X-IM) of AEIgnore Gov spending due to its political motivation Consumption (Wealth affect) P lvl causes fixed wealth thus an increase in P lvl decreases Autonomous Consumption at given levels of income P lvl causes C shift down, vice versa Investment (Intersect effect) P lvl increases Money Demand by increasing Nominal income. The increase in Money Demand increases interest rate which dicreases real investment Inversely related to P lvl Net Exports (Relative Price affect) domestic P implies increase in domestic P relative to foreign P o Therefore lower competitiveness of exports and greater competitiveness of imports. Net exports fall (IM, X) Inversely related to P lvl www.notesolution.com
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