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Saturday, October 20, 2007

Econ -Unit 3- Chap 12 Notes

Aggregate Demand

  • A schedule or curve that shows the amounts of real output that buyers desire to purchase at each price level
  • Negative relation between price level and real GDP

    Aggregate Demand Curve

  • When graphed it curves downward
    • Centered on the income and substitution effect
  • When economy moves down the aggregate curve it moves to a lower general price

    Really-Balances Effect;

  • Change in the price producing creates a real-balances effect

    Inetest-Rtae effect

  • Also curves downward because of interest rate effect.
  • We assume that the supply of money in the economy is fixed
  • A higher price level increases the demand for money

    Foreign Purchase Effect

  • Foreign purchase effect also causes a downward slope
  • When US price levels rises relative to foreign price levels foreigners buy fewer US goods and American's buy more imports
  • Fall in exports; rise in imports

    Determinants of Aggregate Demand

    A change in price level will change amount of aggregate spending and therefore change real GDP of economy

  • If one of the determents of aggregates of demand changes the demand curve will shift
  • A change in one of the determinant of demand that directly changes the amount of real GDP demanded
  • Multiplier effect that produces a greater ultimate change in aggregate demand than the initiating change in spending

    Consumer Spending

  • If consumers buy more output at each price level, the AD curve will shift to the right
  • If they buy less the curve will shift to the left

    Consumer Wealth:

  • Includes both financial assets and physical assets
  • An increase prompts people to save less and buy more

    Consumer Expectation

  • May alter spending
  • When one thinks that their income is too rise they tend to spend more
  • A widely held expectation of surging inflation in the near future may increase AG because consumers will want to buy before prices rise.


  • Reduction in income tax rates raises take-home income and increase consumer purchases at each possible price level
  • Tax cuts shift to right, Tax increases bring curve to left

    Investment Spending

  • The second major determinant of AD
  • Decline in investments = left
  • Increase= left

    Real Interest Rates

  • Increase in interest rates = lower investment spending and lower AD
  • Increase in money supply lowers the interest rate, thereby increasing investment and AD

    Expected Return

  • Expectations: If firms are positive about what will happen in the future they will more likely invest
  • Technology: Better technology enhance expected returns on investment thus increasing AD
  • Excess capacity: Reduce expected return on new investment and decrease AD
  • Taxes: Increase will reduce after-tax profits and lower expected returns.

    Government Spending

  • Increase will shift AD curve to the right
  • Reduction will push curve to left

    New Export Spending

  • Exports=increased foreign demand for US goods

    National Income Abroad

  • Encourages foreigners to buy more products
  • Shift graph to left

    Aggregate Supply

  • A schedule or curve showing the level of real domestic output that firms will produce at each price level

    Aggregate Supply in the Long Run

  • Vertical at the economy's full-employment output
  • Changes in the price level therefore do not change real profit and there is no change in real output
  • Long-run aggregate supply curve: vertical at economy's potential output

    Aggregate Supply in the Short Run

  • Short-Run aggregate supply curve: up-sloping

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