ECO102H1 Chapter 23: Output and prices in the short run
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ECO102H1 Full Course Notes
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Chapter 23 - output and prices in the. The ae curve shifts in response to a change in price level - a change in all the economy"s prices. The relationship between the price level and desired consumption has to do with how changes in the price level lead to changes in household wealth and thus changes in desired spending. What money can buy - its real value - depends on the price level. A rise in the price level lowers the real value of money held by the private sector. A fall in the price level raises the real value of money held by the private sector. Changes in the price level change the wealth of bondholders and bond issues but because the changes offset each other, there is no change in aggregate wealth. A rise in domestic price level (with a constant exchange rate) shifts the net export function downward, which causes a downward shift in the ae curve.
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