ECN 204 Chapter Notes - Chapter 10: Aggregate Demand, Aggregate Supply, Fiscal Policy

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25 Jul 2016
Week 7 – CECN 204 – Chapter 10 Aggregate demand (AD) and Aggregate supply (AS)
AD Total demand for goods and services at different price levels
Aggregate demand is made up of:
- Household demand (C)
- Business demand (I)
- Government demand (G)
- Foreigner’s demand (X-M)
Why AD slopes downwards?
1. Wealth effect: as price levels , people feel relatively poorer -> AD 
2. Rate of interest effect: as price level , interest rate  and AD  (more expensive)
3. Trade effect: as price levels , exports go down (more expensive) and imports = AD
Other factors effecting AD
Factors Increased AD Decrease AD
1. Future expectations optimistic pessimistic
2. Fiscal policy G/T G/T
3. Monetary policy ROI ROI
4. Exchange rate depreciation $ appreciation $
Example M/C
a) Upward movement } price factor
b) Downward movement } price factor
c) Outward shift
d) Inward shift
1. If interest rates fall? c)
2. Canadian dollar continues to appreciate d)
3. Higher price levels? a)
AS Overall availability at different price level
Aggregate supply is upward sloping and becomes steeper and steeper as resources get used up
Other factors effect AS
Factors Increased AS Decreased AS
1. Availability of resources (+) more resources –supply less resources – supply
2. Cost of resources (-) less $ = AS more $ = AS
3. Technology (+) better tech bad tech
4. Productivity of labour (+) better workers AS bad workers AS
5. Future expectations (+) optimistic pessimistic
6. Tax and govt regulation (-) tax + reg  tax + reg
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