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Chapter 10

Chapter 10 - Aggregate Demand and Aggregate Supply

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Department
Economics
Course Code
ECN 204
Professor
Thomas Barbiero

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Chapter 10 Aggregate Demand and Aggregate Supply
10.1 Aggregate Demand
Aggregate demand is a schedule or curve that shows the amounts of real output (real
GDP) that buyers collectively desire to purchase at each possible price level
Aggregate quantity demanded (real GDP) and the price level are inversely related
Slopes downward because of the following effects of a change in price level:
oReal-balances effect: higher price level reduces the purchasing power of the
publics saving balances, therefore spending
oInterest-rate effect: as interest rates rise, less spending occurs
oForeign trade effect: as our price level rises, our exports are less competitive
on world markets therefore foreigners spend less on Canadian goods and
services
oRemember, these changes are changes in price level
Determinants of Aggregate Demand
Changes in consumer spending (shifts of aggregate demand curve)
oConsumer wealth: i.e. housing prices and stock market rises. Increase in
wealth causes wealth effect, nice versa causes reverse wealth effect
oConsumer expectations: future conditions. Higher prices/high incomes in the
future make people spend more of their current income now and save less
oHousehold borrowing: more borrowing means more spending. However, if
consumers are borrowing to pay off debts, AD curve will shift to the left
oPersonal taxes: higher taxes reduce spending and lower taxes increase
consumer spending
Changes in investment spending
oInterest rates: inverse relationships between i and investment
oExpected returns
Expectations about future business conditions if they are optimistic
about future conditions, they will invest more today
Technology new and improved technology increase expected returns
and therefore increase investments
Degree of excess capacity if they are running out of space, they will
invest more
Business taxes
Changes in government spending
Changes in net export spending
oNational income abroad: prosperity abroad shifts the AD right
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Description
Chapter 10 Aggregate Demand and Aggregate Supply 10.1 Aggregate Demand Aggregate demand is a schedule or curve that shows the amounts of real output (real GDP) that buyers collectively desire to purchase at each possible price level Aggregate quantity demanded (real GDP) and the price level are inversely related Slopes downward because of the following effects of a change in price level: o Real-balances effect: higher price level reduces the purchasing power of the publics saving balances, therefore spending o Interest-rate effect: as interest rates rise, less spending occurs o Foreign trade effect: as our price level rises, our exports are less competitive on world markets therefore foreigners spend less on Canadian goods and services o Remember, these changes are changes in price level Determinants of Aggregate Demand Changes in consumer spending (shifts of aggregate demand curve) o Consumer wealth: i.e. housing prices and stock market rises. Increase in wealth causes wealth effect, nice versa causes reverse wealth effect o Consumer expectations: future conditions. Higher priceshigh incomes in the future make people spend more of their current income now and save less o Household borrowing: more borrowing means more spending. However, if consumers are borrowing to pay off debts, AD curve will shift to the left o Personal taxes: higher taxes reduce spending and lower taxes increase consumer spending Changes in investment spending o Interest rates: inverse relationships between i and investment o Expected returns Expectations about future business conditions if they are optimistic about future conditions, they will invest more today Technology new and improved technology increase expected returns and therefore increase investments Degree of excess capacity if they are running out of space, they will invest more Business taxes Changes in government spending Changes in net export spending o National income abroad: prosperity abroad shifts the AD right www.notesolution.com
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