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Chapter 11

Chapter 11 - Macro Economics.docx

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University of Guelph
ECON 1100
Eveline Adomait

Chapter 11 The Aggregate Demand Aggregate Supply Model Aggregate demand aggregate supply model ADAS a model of real output and overall price level determination Model is represented graphically with the overall price level on the vertical axis and real ouput on the horizontal axis Shows how economic factors and policies can simultaneously affect the overall price level as well as real outputThe Three Components of the Aggregate DemandAggregate Supply Model The aggregate demandaggregate supply mode has three central componentsLongrun aggregate supply curve o Related to the concept of potential output Shortrun aggregate supply curve o Related to a key assumption in the short run firms meet demand at existing prices Aggregate demand curveo Derived from the planned aggregate expenditure curveAggregate Demand Aggregate demand curve a relationship between overall spending in the economy and the aggregate price levelShows the amount of planned aggregate expenditure and output at various price levels A lower price level P causes the planned aggregate expenditure curve to shift upwards compared to the planned aggregate expenditure associated with the preexisting price level PA higher price level causes the planned aggregate expenditure curve to shift downIncreases in autonomous aggregate expenditure or expansionary monetary and fiscal policies cause the AD curve to shift to the rightDecreases in autonomous aggregate expenditure or contractionary monetary and fiscal policies cause the AD curve to shift to the leftTwo major explanations for an inverse relationship between the price level and output as depicted by the downwardsloping aggregate demand curveRealbalances effect the hypothesis that overall wealth in the economy will be inversely related to the overall price level and therefore that aggregate demand and the price level will be inversely related
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