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Chapter 10

Chapter 10

7 Pages
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Department
Economics
Course Code
ECN 204
Professor
Amy Peng

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Chapter 10
Aggregate demand
Aggregate Demand Curve
oAggregate demand: schedule or curve that shows the amounts of real
output that buyers collectively desire to purchase at each possible price
level. (negative correlation)
oThree effects of a price level change:
(1)Real balances effect: the inverse relationship between the price
level and the real value (of purchasing power) of financial assets fixed
money value.
(2) Interest-rate effect: the direct relationship between price level and
the demand for money, which affects interest rates, and, as a result,
total spending in the economy
(3)Foreign-trade effect: the inverse relationship between the net
exports of an economy and its price level relative to price levels in the
economies of trading partners
Changes in Aggregate Demand
oDeterminants of aggregate demand: factors that shift the aggregate
demand curve
Consumer spending: demand of output will shift the curve. Other
factors that effects consumer spending are:
Consumer wealth
Consumer expectations
Household borrowing
Personal taxes
Investment Spending: decline in investment spending at each price
level will shift the AD curve to the left (vice versa):
www.notesolution.com
Real Interest rates
Expected returns: expectations about future business conditions;
technology; degree of excess capacity; business taxes
Government spending
Net export spending: based on National income abroad; and
Exchange Rates
Aggregate Supply
*Aggregate supply: a schedule or curve that shows the total quantity of goods and
services supplied at different price levels.
Aggregate supply in the immediate Short run
oLast from a few days to a few months.
oAs long as both input prices and output prices stay fixed. (i.e: wages
compared to output prices)
oImmediate short run aggregate supply curve (ASISR): aggregate supply
curve for which real output, but not the price level, changes when the
aggregate demand curve shifts. (due to fixed prices)
Aggregate Supply in the short run
oBegins after the immediate short run ends
oPeriod of time during which output prices are flexible but input prices
are fixed or highly inflexible.
oShort run aggregate supply curve: for which real output, but not the price
level, changes when the aggregate demand shifts
oan increase in price level increases profits & output,
Real profit = nominal profit / price index (in hundredths) (p.i of 200 = 2)
Aggregate supply in the long run
www.notesolution.com

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Description
Chapter 10 Aggregate demand • Aggregate Demand Curve o Aggregate demand: schedule or curve that shows the amounts of real output that buyers collectively desire to purchase at each possible price level. (negative correlation) o Three effects of a price level change: (1)Real balances effect: the inverse relationship between the price level and the real value (of purchasing power) of financial assets fixed money value. (2) Interest-rate effect: the direct relationship between price level and the demand for money, which affects interest rates, and, as a result, total spending in the economy (3)Foreign-trade effect: the inverse relationship between the net exports of an economy and its price level relative to price levels in the economies of trading partners • Changes in Aggregate Demand o Determinants of aggregate demand: factors that shift the aggregate demand curve Consumer spending: demand of output will shift the curve. Other factors that effects consumer spending are: • Consumer wealth • Consumer expectations • Household borrowing • Personal taxes Investment Spending: decline in investment spending at each price level will shift the AD curve to the left (vice versa): www.notesolution.com • Real Interest rates • Expected returns: expectations about future business conditions; technology; degree of excess capacity; business taxes Government spending Net export spending: based on National income abroad; and Exchange Rates Aggregate Supply *Aggregate supply: a schedule or curve that shows the total quantity of goods and services supplied at different price levels. • Aggregate supply in the immediate Short run o Last from a few days to a few months. o As long as both input prices and output prices stay fixed. (i.e: wages compared to output prices) o Immediate short run aggregate supply curve (AS ISR): aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curve shifts. (due to fixed prices) • Aggregate Supply in the short run o Begins after the immediate short run ends o Period of time during which output prices are flexible but input prices are fixed or highly inflexible. o Short run aggregate supply curve: for which real output, but not the price level, changes when the aggregate demand shifts o an increase in price level increases profits & output, Real profit = nominal profit / price index (in hundredths) (p.i of 200 = 2) • Aggregate supply in the long run www.notesolution.com o Time horizon over which both input prices and output prices are fully flexible. o Long run aggregate supply curve associated with a time period in which input prices are fully responsive to changes in the price level. o In the long run when both input prices and output prices are flexible profit levels will always adjust to give firms exactly the right profit incentive to produce exactly the full employment output level GDP o an increase in price level leads to increases in nominal wages, shifting short-run AS leftward • Changes in aggregate supply o Determinants of aggregate supply: factors that shift the aggregate supply curve Input prices: • Domestic resource prices (wages and salary) * Per unit cost decrease, AS curve shift to the right (vice versa) o Labour supply increases because of substantial immigration. Decreasing wages o Labour supply decreases because a rapid increase in pension income causes many older workers to opt for early retirement o Price of capital falls because of declines in prices of steel o Land resources expand through discoveris of mineral deposts, irrigation of land, or technical innovations that transform “non-resources” into valuable r
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