11I Flexible Price Model - AD and AS

4 Pages
Unlock Document

University of Toronto St. George
Gustavo Indart

AGGREGATE DEMAND AND SUPPLY The Price Level and Aggregate Expenditure An increase/decrease in the price level (P) shifts the AE curve downward/upward This shift of the AE curve is due to the effect of changes in P on: 1. Consumption: According to the Life-Cycle theory of consumption, households save to accumulate wealth that they can use during their retirement. An unexpected rise in wealth would shift consumption curve up (and saving curve down) since less will be needed for retirement An increase in P lowers real wealth, reduces the real value of money, and bondholders’ perception of their wealth decreases 2. Net Exports: An increase in P makes domestic goods relatively more expensive than foreign goods. NX decreases as P increases (exports decrease and imports increase) The Aggregate Demand Curve The price level (P) and equilibrium income (Y) are negatively related to each other As P increases, Y decreases. This relationship is expressed by the aggregate demand curve At any P level, the corresponding Y represents the value of the quantity demanded of goods and services. For any given P level, the AD curve shows the level of Y for which AE = Y A change in P causes the AE curve to shift but the AD curve doesn’t shift. (A change in P represents a movement along the AD curve) The slope of the AD curve depends on the sensitivity of C and NX to a change in P. Therefore, the greater the sensitivity of AE to a change in P, the flatter the AD curve The Aggregate Supply Curve Short-run AS curve (SRAS) shows the output firms are willing to produce at each P level The construction of the SRAS requires the assumption that the level of technology, the stoc
More Less

Related notes for ECO100Y1

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.