Exam: Ch.12 – 16
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Chapter 12: “Aggregate Demand and Aggregate Supply”
Aggregate Demand: Shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, government, and the rest of the world. -A movement down the AD curve leads to a lower aggregate price level and higher aggregate output. * Y = C + I +G + NX
(before adding G and NX back into the Keynesian Cross to discuss fiscal policy and trade.) Now- price level.
The Aggregate Demand Curve: Shows the relationship between the aggregate price level and the quantity of aggregate output demanded. *Not the same as micro. *if all prices change
Wealth Effect of a change in the aggregate price level: the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers’ assets. Interest Rate Effect of a change in the aggregate price level: the effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers’ and firms’ money holdings.
Downward sloping for two reasons:
1. Wealth effect of a change in the aggregate price level. This reduces purchasing power in households, reducing consumer spending. a. A fall in the price level is an increase in purchase power. -Shift up of planned AE aggregate expenditure curve.
-Shift along the aggregate demand curve.
2. Interest rate effect of a change in aggregate price level. Aggregate Definition: A collection of items that are gathered together to form a total quantity.
-If you lower the price level…
* There is a movement along the aggregate demand curve.
* This increases output and consumption, shifting Planned aggregate spending upward, resulting in a new Y2 along the 45degree line. * Resulting in more GDP
Therefore, Lower price level = higher consumption, AE curve goes up. **A shift in the price level causes:
* Shift of the AE curve
* Movement along the AD curve
* Anything that changes firm production or consumption = a shift. AD curve shifts when:
* Changes in expectations
* Changes in wealth
* Changes in stock of physical capital
* If existing stock of physical capital is relatively small, AD increases * Change in government spending
* Fiscal and monetary policy
Factors that Shift Aggregate Demand:
-Aggregate demand Increases when:
* Changes in expectations:
* when consumers and firms become more optimistic.
* Changes in Wealth:
* When the real value of household assets rise.
* Size of the existing stock of physical capital:
* When the existing stock of physical capital is relatively small. * Fiscal Policy:
* When the government increases spending or cut taxes. * Monetary Policy:
* When the central bank increases the quantity of money.
Increase in output = increase in consumption or investment - increase in AD. * An inward shift would be caused by a rise in interest rates due to worse business conditions. Multiplier effect: upward move in the $ market.
Monetary Policy: If bank increases quantity of money, AD increases.
Aggregate Supply Curve: the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy. *In the LR total possible production doesn’t depend on prices. only on physical capital, human capital, and technology.
*In the SR prices may affect how much production is possible. wages are different than other prices.
SR aggregate Supply Curve: Upward sloping because...