EC140 Lecture 8: EC-140 Lecture 8
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The money people hold can buy fewer goods. People are effectively poorer consumption falls. Similarly: a fall in prices: value of money held goes up, consumption therefore rises. Aggregate demand curve shows level of real gdp for each price level where desired aggregate expenditure equals actual gdp: equilibrium output from the simple macro model for each price level. Changes in the price level cause: shifts of the ae curve, movements along the ad curve. As prices rise: people are poorer, consumption falls, foreign goods are relatively cheaper, imports rise, exports fall. All 3 changes mean that as prices rise, real gdp falls: move up and left along the ad curve. If ae shifts up, ad increases and the ad curve shifts right. As ae shifts up, real gdp increases. Shift derived from simple multiplier = 11 . As curve shows for each price level the amount of output firms would like to produce and sell.
