ECON 209 Lecture Notes - Aggregate Supply, Aggregate Demand, Potential Output
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28 Apr 2013
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Ae curve shifts in response to change in price level; occurs b/c change in price level affects desired consumption and desired net exports. Changes in price level lead to changes in household wealth and thus changes in desired spending. What money can buy its real value depends on price level. Rise in price level lowers the real value of money; reduction in price level raises value of money. Change in price level change wealth of bondholders and bond issues but b/c changes offset each other there is no change in aggregate wealth. A decrease in wealth leads to decrease in desired consumption and downward shift in ae. When price level rises and exchange rate remains unchanged, canadian goods become more expensive relative to foreign goods which causes a decrease in exports and increase in imports. Rise in price level shifts net export function downward which shifts ae curve down.
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