ECON 295 Chapter 23: Chapter 23.docx
9 Jan 2015
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Document Summary
The demand side of the economy: 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: 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: the aggregate demand curve.
