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Chapter 23

ECON 295 Chapter 23: Chapter 23.docx

Course Code
ECON 295
Kenneth Ragan

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Chapter 23
I) The Demand Side of the Economy
A) Changes in the Price Level
The AE curve shifts in response to a change in the price level. This is because price level
affects desired consumption and desired net exports.
Changes in Consumption
A rise in price levels lowers the real value of money held by the private sector (individuals,
firms…), thus lowering the desired consumption.
Changes in the price level change the wealth of bondholders and bond issuers but because
the changes offset each other, there is no change in aggregate wealth.
Changes in Net Exports
A rise in price levels shifts the net export function downward, which causes a downward shift
of the AE curve.
B) Changes in Equilibrium GDP
Downward shits of the consumption function and the net export function causes a downward
shift of the AE curve. This in turn causes a fall of the equilibrium of real GDP.
C) The Aggregate Demand Curve
Price level and equilibrium GDP are negatively related. The aggregate demand curve (AD)
shows the relationship between the price level and equilibrium of real GDP.
For any given price level, the AD curve shows the level of real GDP for which desired
aggregate expenditure equal actual GDP.
Shifts in the AD curve
Any change (other than the price level) that causes the AE curve to shift will also cause the
AD curve to shift. Such a shift is called aggregate demand shock.
If the AE curve shifts upward the AD shifts right
Simple Multiplier
This measures the horizontal shift in the AD curve in response to a change in the AE curve.
II) The Supply Side of the Economy
A) The Aggregate Supply Curve
The AS curve relates the price level to the quantity of output that firms would like to produce
and sell on the assumption that technology and the prices of all factors of production remain
The Positive Slope of the AS Curve
We need to see how costs and price are related to output.
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