EC140 Chapter Notes - Chapter 23: 5, Government Spending, Aggregate Supply
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EC140 Full Course Notes
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Chapter 23 output and prices in the short run. The ae curve shifts in response to a change in the price level (all of the economy"s prices) The shift occurs because a change in the price level affects consumption and net exports. 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 to changes in desired spending. What money can buy (its real value) depends on the price level. The higher the price level, the fewer goods and services a given amount of money can purchase (i. e. a rise in the domestic price level lowers the real value of money and *increases the interest rate) Similarly, a reduction in the price level raises the real value of money and *lowers the interest rate.