Ch 11 introduced ad, ch 12 will introduce aggregate supply (as), with both short term and long term analysis. Ad was driven by ae as it reacts to different price levels. As will demonstrate levels of supply at those same price levels. The initial graph will relate ad, a short run consideration in itself, and as in the short run (sras). Later the long run, lras, will be added to the analysis. Gdp has four components: consumption (c), investment (i), government purchases (g), and new exports (nx). Y = c + i + g + nx. The wealth effect: how a change in the price level affects consumption. The phenomenon of price level fluctuations affecting consumption is called the wealth effect. Lower prices increases perceived wealth and increases consumption. The interest-rate effect: how a change in the price level affects investment. The impact of the price level on investment is known as the interest-rate effect.