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Midterm

EC140 Study Guide - Midterm Guide: Money Market Fund, Real Interest Rate, Monetary Transmission Mechanism


Department
Economics
Course Code
EC140
Professor
Ken Jackson
Study Guide
Midterm

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Macroeconomics Midterm #2
1
Chapter 23
The Demand Side of the Economy
What happens if the price level rises?
- Change in Consumption
o The money that people hold can buy fewer goods
o People are effectively poorer consumption falls
o A rise in price level lowers the real value of money
o A fall in price level raises the real value of money
o C = a + b (1-t)Y
o A rise in price level leads to a decrease in wealth and in autonomous
consumption (reduction in a) and to a downward shift in the AE function
o A fall in price level leads to a rise in wealth and in autonomous consumption
(increase in a) and to an upward shift in the AE function
- Changes in Net Exports
o When domestic price level rises, Canadian goods become more expensive
relative to foreign goods
o Consumers in other countries reduce their purchases of Canadian made goods
Exports decline
o A rise in the domestic price level shifts the export function downwards, which
causes a downward shift in the AE curve
o A fall in domestic price level shifts the net export function upwards, and AE curve
upwards
Aggregate Expenditure and The Price Level
- An exogenous increase in the price level
causes the AE curve to shift downward from AE0
to AE1
- The equilibrium changes from E0 to E1 and
real GDP falls from Y0 to Y1
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Macroeconomics Midterm #2
2
Derivation of the AD Curve
- As the price levels rise from P0 to P1
to P2
- the AE curve shifts downwards from
AE0 to AE1 to AE2
- in the bottom graph, a movement
occurs up along the AD curve
- a change in the price level causes a
shift in the AE curve but a movement
along the AD curve
The Aggregate Demand Curve
- Vertical Axis price level
- Horizontal axis real GDP
- Shows the combination of real GDP
and the price level when desired
aggregate expenditure equals actual
GDP
- Changes in price level because:
o Shifts of the AE curve
o Movements along the AD
curve
- Increase in Price reduce the real GDP because
o Consumption falls
o Exports fall
o Imports rise
- As price rises
o People are poorer, consumption falls
o Foreign goods are relatively cheaper, imports rise
o Exports fall
- All 3 changes mean that prices rise, real GDP
o Falls
o Move up and left along the AD curve
Aggregate Demand: Open vs. Closed
- Closed economy
o An increase in P reduces the real GDP
because consumption fall
o Is steeper because the price level has a
smaller effect on out put
o Only consumption changes
- Open economy
o Consumption and net export adjust
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Macroeconomics Midterm #2
3
Shifts in the AD curve
- Any change other than a change in price level causes the AE curve to shift will also
cause the AD curve to shift
o Interest rate change
o Consumer confidence
o Business confidence
o Government spending
o Foreign incomes
o Such a shift is called Aggregate demand shock
- AE = A + zY
- An increase in autonomous aggregate expenditure (A) shift the AE curve upward and the
AD curve to the right
- A fall in autonomous aggregate expenditure (A) shifts the AE curve downwards and the
AD curve to the left
- The simple multiplier measures the horizontal shift in the AD curve in response to a
change in autonomous expenditure
- Simple Multiplier = 1 / 1-z
The simple multiplier and shifts in the AD curve
- an increase in autonomous expenditure
shifts the AE curve upwards from AE0 to AE1
- the size of the horizontal shift of the AD
curve is equal to the simple multiplier times
the increase in autonomous expenditure
The Supply Side of the Economy
The Aggregate Supply Curve
- vertical axis price level
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find more resources at oneclass.com
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