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ECN204 Notes AFTER Midterm

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ECN 204
Amy Peng

Macroeconomics (AFTER MIDTERM) Aggregate Expenditure Model x-axis = AE (plant total spending) y-axis = Y (GDP) [o]LZ)z (short-term) ]L]o]]KZ[o]LK AE = C + I + G + NX Aggregate Supply & Demand Model - Shows how economic factors & policies can simultaneously affect overall price level along with real output; price does not chance - Deals with changes in overall price level of economy o Consumer Price Index, not inflation o General level of pricesirectly determines purchasing power of money o Stagflation was difficult to explain with Keynesian cross model; Stagflation = economy experience high inflation & high employment Aggregate Demand (AD) - Amounts of real output that buyers collectively desire to purchase at each possible price level - Planned AE & AD: - Price level falls 9-9[ - Output level increase z[-z - Downward slope to AD (Aggregate Demand) www.notesolution.comAggregate Demand (AD) - Slopes downward because of following effects of change in price level: 1. Real-balances effect J directly related to price & how much money to hold price := purchasing power ;; demand ; 2. Interest-rate effect J money demand, ability to hold cash in pockets; money supply normally fixed , but money demand not fixed money demand :7L} ZL2]LZo)high interest rate Change in investment 3. Foreign trade effect J export J imports = net exports exports falling, imports:; domestic products price :, demand ; - AD shifts = demand shock (negative leftright positive); due to other factors other than price changing our behavior Determinants of Aggregate Demand - Consumer spending N Consumer wealth, consumer expectations, taxes, household indebtedness - Investment Spending N Real interest rates N Expected returns Expectations about future business conditions Technology Degree of excess capacity Business taxes - Government Spending - Net Export Spending N National income abroad, exchange rates Aggregate Supply - Level of real domestic output that will be produced at each price level; input & output prices - Production responses to price level changes differ in long run & short run long run J economy can only produce up to potential GDP short run J produce more? - Input prices J contracts, prices cannot change for long period of change - Output prices J surplusshortage influence price Aggregate Supply Long Run - I] o }L}K[Zoo employment output (potential GDP) - Wages & other input prices risefall to match changes in price level - ZL2Z]L] oo}L[ ZL2o}]Z[ZL} ZL2]Looutput
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